What is Escrow? How Does it Work?

As U.S. home mortgage loan problems continue to mount, regulators and experts are looking into all potential sources of trouble throughout the confusing home loan application process.

One recently spotlighted (and previous overlooked) element has been the small but pivotal role of the escrow service. It’s very important to understand how this works as you proceed.

What is an escrow?

Money and documents deposited with an escrow officer are used and disbursed through instructions of all the parties involved in a real estate transaction.

How does escrow work?

The escrow process typically starts after a buyer and a seller agree to a deal and sign a contract.

An escrow officer gets the contracts and begins working on transferring title of the real estate, contacting the mortgage lender, prorating property taxes, home inspections and researching any payoffs, including the transaction.

At the date of closing, the escrow agent disburses funds to the parties and records the new documents of ownership.

Whom does an escrow officer work for?

The escrow officer’s role is to be a fiduciary, with duties to all parties who have an interest in the property. The most important duty is to safeguard the escrow.

An officer who releases escrow property in violation of an escrow agreement is subject to regulator fines and penalties as well as criminal charges for theft. Lately, federal regulators are investigating many such acts as perpetrations of mortgage fraud.

How should a person select an escrow firm?

A real estate agent, lender and mortgage broker often have escrow officers they regularly work with, and if their businesses are affiliated in any way, that must be disclosed to the customer.

Home buyers and sellers can always choose their own escrow or title firm and question any fees.

As we know, the housing market is very competitive, and most escrow firms rely on volume to make money - so escrow fees are also very competitive if you’re willing to shop around.