What Is Escrow? 3 Things You Need To Know About Escrow Before Buying A Home
by Brook Walsh
on Tuesday, January 29th, 2019 at 9:30pm.
The purchase of your first home can be an exciting and exhilarating process. Homeownership is something that many people dream of. Owning your own home means not being held accountable to a landlord. It means the freedom to paint, remodel, and redecorate your space how you like. It means creating the perfect space for you and your family to build a life together and create memories that will last a lifetime.
For most people, the purchase of a home is also the largest transaction they will make. This can be daunting. Few buyers have the resources to buy a home outright, and this can make the buying process even more complicated because lenders are involved too. One of the biggest challenges that new home buyers face is understanding the buying process and all of the lingo that comes with that process.
Often, when a home is sold, an escrow agent is brought in. Today, we’re going to look at the escrow process and what that entails.
WHAT IS ESCROW?
As a buyer, a home is likely to be the most valuable item that you ever purchase. As a seller, your home is very likely your biggest source of savings. For both parties, the process of buying and selling a home can come with its financial risks. What if the seller takes the buyer’s money, but doesn’t give them the home title? Likewise, what if the buyer does not give the seller the full amount of money as promised, but the seller has already given them the title? The escrow process is supposed to help reduce the amount of risk involved in this process.
An escrow agent is a person that belongs to a neutral third party. This person is not representing the buyer or the seller. Instead, they act as a mediator between the two groups. Their main role is to hold the assets involved in the exchange until the process is completed, and it is clear that both parties will be getting what they had agreed upon. Assets they could hold would include:
Home inspection results
Even if you have not purchased a house before, you may have encountered the escrow process before. Escrow agents do not only help with home sales. They can also help with any very large transaction where risk is associated.
WHY IS ESCROW HELPFUL?
There are many reasons that a home sale might fall through, and if a home sale does not proceed, the escrow process can protect both buyers and sellers.
Often, buyers will submit a home buying offer that includes contingencies. The offer could suggest that the buyer will pay a certain amount of money for the home given that:
The buyer is approved for a mortgage
The home passes a house inspection
The water is tested and results indicate it is safe
There are no problems with the title of the home
If the results of all these inspections come back perfect, the sale should be simple. However, let’s say that the home fails the house inspection. The buyer might still want to buy the home, but they are no longer willing to pay the price that was previously agreed upon. This means both parties will need to renegotiate the value of the home. When all the assets are being held in escrow neither party is at risk of losing what they have already put into the transaction. If the deal fell through at this point, the escrow agent would give the buyer back their deposit and return the title to the seller.
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