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Escrow Account

Escrow accounts are a common part of a real estate purchase. In this article, we’ll define the term “escrow account.” 

Key Takeaways

  • An escrow account is a type of bank account in which a third party holds funds on behalf of two or more parties involved in a transaction until certain conditions are met
  • In real estate, escrow accounts are used to protect the buyer and seller 
  • Escrow accounts may be used to hold funds for property taxes, homeowner’s insurance, and other expenses related to the property 
  • It’s common for a buyer to deposit a certain amount of “earnest money” into an escrow account upon signing a purchase agreement to show they are serious about the purchase
  • Once the mortgage is approved, the lender may require the borrower to fund the escrow account with several months’ worth of property taxes and homeowners insurance

What Is an Escrow Account?

An escrow account is a type of bank account or arrangement in which a third party holds funds or documents on behalf of two or more parties involved in a transaction until certain conditions or obligations are met. The use of an escrow account is typically designed to provide a level of security and trust for all parties involved in a transaction.

Escrow Accounts in Real Estate

In real estate transactions, an escrow account is a financial arrangement that is set up to hold funds and documents during the buying or selling process. The purpose of the escrow account is to protect both the buyer and seller by ensuring that all the necessary conditions are met before the funds are released.

When a buyer purchases a home and takes out a mortgage loan, the lender may require them to set up an escrow account to hold funds for their property taxes, homeowner's insurance, and possibly other expenses related to the property. These funds are then used to pay these bills when they come due.

The escrow process begins when the buyer and seller sign a purchase agreement. At that point, the buyer typically deposits a certain amount of money into an escrow account to show that they are serious about the purchase. This is called "earnest money." The funds are then held in the escrow account until the transaction is completed.

Once the mortgage loan is approved, the lender will typically require the borrower to fund the escrow account with an amount equal to several months of property taxes and homeowner's insurance. The lender then takes responsibility for making these payments on the borrower's behalf when they come due. This ensures that the property taxes and insurance premiums are paid on time and the property remains protected.

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