Escrow is a process in which valuables are placed into an account controlled by a neutral third party for distribution according to specified instructions. The escrow process is usually used to disburse cash, but it can also be used to exchange other items of value, such as proprietary software codes, art objects and manuscripts. An escrow can be used in any transaction in which it is important to ensure that all aspects of a contract, legal order or some other agreement, are fulfilled before a final disbursement is made.
Real Estate Escrow
In the United States, escrow is commonly used in real estate transactions, including the sales of homes.
In a typical real estate transaction, an escrow account is opened shortly after a buy-sell agreement is signed by the buyer and seller. The buy-sell agreement spells out the terms of the transaction, including the price and to whom funds are to be disbursed. An escrow agent, who is usually an attorney or officer of a title insurance company, accepts money into the escrow account from the buyer and the buyer’s lender, then disburses the funds according to the buy-sell contract. In addition to distributing funds to the seller, the escrow account is used to ensure that all material items associated with the transaction, including loan fees, title insurance and deed transferal fees, are paid. The escrow is said to close when all terms of the agreement are carried out and all funds are disbursed.
Responsibilities of an Escrow Agent
An escrow agent in a real estate transaction is responsible for following all of the escrow instructions compiled by the buyer and seller, as well as the handling of documents and payments associated with the loan. The agent’s responsibilities include ensuring that all relevant payments are made to and from the escrow account, and that necessary documents are received on time. When all actions required by the escrow instructions have been taken, the escrow agent closes the escrow and the transaction is complete.
The buyers and sellers in a real estate transaction choose the escrow agent by agreement. Since the escrow agent must, by definition, be a neutral entity, no single party has the right to choose an agent that is rejected by the other party or parties involved.
Lender Escrow Accounts
Mortgage lenders can set up an escrow account, also known as an impound account, to ensure that items crucial to the clear ownership of the property and to the property’s protection, including property taxes and insurance, are paid.
If an impound account is established, the lender collects a set amount each month from the borrower along with each mortgage payment, then pays periodic tax and insurance bills from the account. Impound accounts typically do not accrue any interest for the borrower, but if funds are left in an account when the loan is terminated, the balance is refunded to the borrower.
Some lenders require impound accounts on all mortgages. Others will allow borrowers with sufficient equity levels to handle their own payments.
The amounts that lenders can impound in any particular account are regulated by the federal Real Estate Settlement Procedures Act, or RESPA.
Common Uses for Escrow
Escrow accounts have been used for years to handle court judgments. For example, a company that is ordered to perform an environmental cleanup might be required to deposit funds into an escrow account run by a court-appointed trustee, who then disburses funds as the work progresses.
Escrow is commonly used in large transactions between private parties, increasingly including transactions arranged through Internet sites such as eBay. The federal government’s Internet Fraud Complaint Center maintains a database on fraudulent escrow services that have been set up to dupe online customers.
Escrow on Intellectual Property
An escrow can be created in order to transfer or to hold intellectual property. For example, a proprietary software code that is involved in a sale might be held in escrow until funds for the sale are transferred, to reduce the risk that it will be stolen. A proprietary software code owned by one company that is indispensable to another company’s product might be held in escrow in the event that the first company goes out of business, in which case the code would be preserved for the second company’s use.
Related Escrow Resources
ABCNews.com: Save Thousands on Closing Costs [1] About.com Banking/Loans: Escrow Fee [2] About.com Crime/Punishment: Judgment [3] About.com Crime/Punishment: Phony Escrow Services [4] About.com eBay: Quick Tips for Escrow on eBay [5] About.com Home Buying/Selling: Buyer's Closing Costs - What Does it Cost to Close Escrow? [6] About.com Home Buying/Selling: Earnest Money Deposits - Protect Your Good Faith Deposit [7] About.com Home Buying/Selling: Escrow [8] About.com Home Buying/Selling: Escrow Agents [9] About.com Home Buying/Selling: How the term Escrow Relates to Your Real Estate Transaction [10] About.com Home Buying/Selling: How to Handle Impound Account Shortages [11] About.com Home Buying/Selling: RESPA [12] About.com Home Buying/Selling: Smart Buyers Don't Close Escrow Without a Title Insurance Policy [13] About.com Home Buying/Selling: The Home Closing Process [14] About.com Home Buying/Selling: Title and Escrow [15] About.com Home Buying/Selling: Title Insurance Policies [16] About.com Home Buying/Selling: Walking Away From Closing [17] About.com Home Buying/Selling: Writing Offers and Negotiating Acceptance [18] About.com Linux: Definition of Escrow [19] About.com Used Cars: Definition of Escrow [20] American Escrow Association: Homepage [21] eBay: Using Escrow Services [22] Escrow.com: Homepage [23] FreeAdvice.com Commercial Real Estate: What Does Escrow Mean? [24] Internet Crime Complaint Center: Homepage [25] ivmpublications.net: What Does Escrow Mean? [26] Real Estate Dispatch: A Primer on Escrowed Funds [27] Real Estate Dispatch: Escrow: What Is It and Where Did It Come From? [28] RealEstateABC.com: Your Escrow and You [29] SmartMoney.com: Cut Those Closing Costs! [30] The California Escrow Association: Homepage [31] U.S. Department of Housing and Urban Development: FAQs About Escrow Accounts for Consumers [32] U.S. Department of Housing and Urban Development: RESPA - Real Estate Settlement Procedures Act [33] Wallet Pop: Closing Costs Calculator [34] WikiAnswers.com: What Does It Mean To Roll Over Your Escrow? [35] Yahoo.com: What Does In Escrow Mean? [36]