There are usually only two times when purchasing a home that you will deal with escrow – funds being held by a third party. Once during closing, and then each month when you make your real estate mortgage payment.
When you make an offer on a home, you will write an earnest money check that will be placed in an escrow account, usually controlled by a local title company. This money doesn’t go to the seller until after closing. Neither the buyer nor the seller can touch the money until either closing, or if the deal falls apart. If the deal fails to close, then the terms of the real estate contract determine who gets the escrow money. Both parties – buyer and seller – must agree in writing to disbursement of the earnest money, or the dispute will go to mediation and a third party mediator will make the decision on who gets the earnest money held in escrow.
There is another type of escrow that the lender may use for your insurance and taxes. Money from your monthly payment goes into a lender-controlled escrow account. Each month or more typically once per year, the lender will pay your home insurance and property taxes using this escrow money. Each year the lender will re-evaluate the money needed in escrow and may raise or lower your monthly payment to ensure there is enough money in escrow to pay these important costs. The lender has a vested interest to ensure these bills are paid so the house is covered by insurance and there are no tax liens filed against the property for unpaid taxes.
What is a hold-back of funds?
There may be times when a real estate transaction closes, title to the property changes hands, yet funds are still left in escrow. For instance, if you agreed to let the seller stay in the home a few days until their new home is ready, I would have you sign a “rent-back agreement” with the seller requiring them to pay you a daily rate to rent the home from you for the duration of their stay. In that case we may decide to place a portion of the sale proceeds into escrow until they have moved out and left the house in the condition agreed to in the contract, and paid the rent money for their stay.