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What Is An Escrow Agent?

Hanna Kielar May 10, 2024

When you’re selling your home, money will eventually get transferred to you. But how it’s transferred isn’t as easy as someone just handing you money. Buyers will put cash into escrow where an escrow agent oversees the handling of it before it gets to you.

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Escrow has two different, distinct operations, one before you finalize buying a home and one after you get a mortgage.

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What Is Escrow Before You Buy A Home?

Escrow is the method by which money or an asset (like a title) is held in between two parties: the home buyer and the seller. Instead of the home buyer giving the seller money to buy the home, it goes into an escrow account with a third-party company that acts like a middle person between both. 

When the terms of a contract are met – usually when a buyer signs their contract at closing – the money in escrow is transferred to the seller. It’s good for the buyer, who can avoid putting their money in the hands of a fraudulent seller, and it’s good for the seller, who makes sure their potential buyer has the funds to buy their home.

This type of account is short-lived; once you go through with the sale, it no longer has a purpose.

What Is Escrow After You Buy A Home?

After a home purchase, a second escrow account is opened by your mortgage lender. This account is used to pay some of your taxes and homeowners insurance payments. Your lender uses the escrow account to make payments on your behalf to ensure they’re paid on time. 

The money for that escrow account is prepaid at closing. Some lenders require upfront costs, like a year’s worth of homeowners insurance, to be put in escrow when you close on your home. Property taxes will also go into escrow, but how much depends on what your lender requires. For instance, they might request 3 months’ worth of tax payments upfront. If your property taxes increase, your escrow payments will go up as well. If your insurance premium goes down, so will what you need for escrow.

What Is An Escrow Agent?

Escrow agents are people or entities in charge of handling the transaction between the buyer and seller. This is a neutral, third party that’s entrusted to handle the transfer of money or assets once all the conditions have been met. Responsibilities include:

  • Standing as a neutral party between homeowner and potential buyer
  • Handling the title insurance policy
  • Reviewing and ensuring that the buyer meets the lender’s requirements
  • Preparing escrow documents
  • Distributing funds to responsible parties (seller, agents, lenders, etc.)
  • Closing escrow once conditions are met

Who Can Be An Escrow Agent?

While some states and jurisdictions permit attorneys to serve as escrow agents, it’s always a neutral third party that serves that role. Because of this, neither the buyer’s nor the seller’s representative can serve as an escrow agent. However, both agents might recommend an individual or a company to serve as an escrow agent.     

Do You Need An Escrow Agent?

In order to transfer money from the buyer to the seller once all the sales conditions are met, there should be escrow agent. 

Sellers and buyers typically aren’t responsible for finding their own escrow agents. That’s usually a job left for the real estate broker or lender to handle; however, if you need to find one on your own, it may not be as hard as you think.

In real estate functions, like selling a home, an escrow agent is usually a title company.

The buyer will wire transfer money – usually a down payment – to the title company. The title company will hold onto funds while the buyer and seller meet the necessary conditions for a sale to be completed.

Once the conditions are met, the title company acting as an escrow agent will transfer the corresponding money or assets to the seller.