What is Escrow?

Many people wonder what an escrow account is and want to know if they need one when they find a parcel of land for sale that they are interested in purchasing.

The term escrow generally refers to an agreement that funds are put in trust of an escrow agent, who is a neutral third party, until the completion of a contract takes place and all conditions are met. The third party that is holding the money until contract fulfillment then returns the funds to the rightful person if there were no problems with the contract. If the contract conditions were not met, the funds being held are used as necessary to meet the terms of the contract or are turned over to the other party as stated in the terms of the contract.

An escrow account is also often used when a real estate transaction closes. In this case, the lender requires the buyer to set up an escrow account that is used to cover the buyer’s homeowner’s insurance premiums and property taxes.  The buyer sets up the escrow account and makes a first deposit. After that payments are made monthly into the account and the property taxes and homeowners insurance are paid by the escrow agent using the funds in the account. This type of escrow account is put into effect to protect the lender. It ensures that the property taxes and homeowners insurance are paid on time and stops the possibility of a tax lien being laced on the property for unpaid taxes. In the case of homeowners insurance, the lender is ensured that payments are being made safeguarding his collateral for the loan in case a fire or other covered catastrophe destroys the house.

When funds are placed into an escrow account, they do not gain interest.  Because of this, many buyers prefer not to have an escrow account set up.  The buyer must meet certain requirements, for example a twenty percent deposit, to avoid having to set up an escrow account.

The laws regarding escrow accounts and the licensing for handling escrow accounts are different in many states. In many states to be an escrow agent companies must be individually licensed, in others the transfer of funds into an escrow account can only be handled by an attorney.

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