What is an escrow company?
Commonly used in real estate transactions, an escrow company holds money and documents between parties. As a neutral third party, the escrow company helps facilitate the homebuying and selling process.
An escrow company, with the help of an escrow agent, provides an important service during the homebuying and selling process. As the homebuyer and seller sign contracts and negotiate details, the escrow company holds all pending documentation and money between the two groups. The agent working for the company is often an attorney, but does not have to be under all state laws. The agent maintains a fiduciary responsibility to all parties involved in the transaction.
Once the sales process begins, documents and money will need to be exchanged between the parties involved, and the escrow company facilitates this. All money, funds, titles and securities involved in the transaction are maintained during the closing process by the escrow company and until the property legally changes hands.
This often includes escrow payments or good-faith payments made from the homebuyer to the seller to take the property off the market after an accepted offer. It also includes the changing hands of any down payment and mortgage funds between the buyer and the seller, as well as the title, until all components of the transaction occur. As a middleman, the escrow company reduces the risk of a title changing hands without funding.
Escrow company example
Sue lists a home for sale and the James family places an offer. Sue accepts the offer. The Jameses make an initial escrow payment to Sue to hold the contract while their lender finalizes paperwork. At the closing, the escrow company facilitates the transfer of funds from the buyer’s mortgage lender to the seller. The escrow company also works to ensure that the title is transferred to the buyer from the seller. The escrow company charges a fee for providing this service through the closing process.
Use Bankrate’s down payment calculator to learn more about how big of a down payment you can afford.