What's escrow and how does it play into purchasing property?

Question

I kind of get the idea regarding escrow. If I make a 10% deposit, I asked or have it detailed in the contract that the deposit will go into escrow until the final construction punch list has been completed. Am I right or wrong.

Answer 1

You are kind of on the right track. Escrow is a predetermined amount of money that is set aside for a specific purpose. The money cannot be assigned for things like rent or even deposits. It also cannot be used by either party as a money making source. It cannot be used to earn interest for either party. Several examples could be the following

On the sale of an existing house there is a question on whether the air conditioning is working right. An amount of money, say $5,000 is set aside in escrow by the seller to pay for fixing the air conditioner. This way the sale of the house can continue without a question of the AC working or not. Any money left over is returned to the original person.
An escrow can, and usually is used by mortgage specific required payments. The mortgage company determines how much money will be required for insurance and taxes, It will collect this money along with the principle and interest payments and then pay the taxes and insurance when they are due. The mortgage cannot use the money to earn interest or use it to pay the principle and interest.pp

Answer 2

In general escrow refers to any money that is held until certain conditions are meant. In terms of a purchase and sales agreement on property escrow generally refers to the "deposit" made as part of the contract. The money is held "in escrow" which is typically a non-interest bearing account. In my state (NH) that is generally the listing agency, but may be different for other states.

Actually this money isn't really a deposit - it is ernest money. It is money that the buyer would generally forfeit if they default or fail to live up to the terms of the contract. At closing the buyer gets credited with the amount of the escrow money. If the contract is voided because one of the contingencies was not satisfied, for example the home inspection was not satisfactory or the buyer is unable to obtain financing, most contracts provide for the escrow to be refunded to the buyer. (You would need to check the exact wording of your contract and seek legal advice as needed.)

Sometimes with new construction a builder might insist on the deposit being non-refundable. From their prospective it's justified because they obviously are expending a lot of money building the home.

Escrows can also refer to other things. Lenders will generally keep an escrow for taxes and sometimes condo fees or insurance. Here I think they generally are kept in interest-bearing accounts.

Sometimes escrows are set up for other things. For example, if you close on a new home in the winter time the builder may be required to escrow funds to take care of seeding a lawn or paving a driveway when the weather permits.

Answer 3

What you are referring to is funds being HELD in escrow. In real estate there is this and then there is escrow associated with your property taxes and homeowners insurance. What you are refering to is the first one.

An escrow account is simply an account that holds fund in trust for the payment of a financial obligation upon fullfillment of a condition, which in this case would be the completion of your home. Most builders and sellers will hold any earnest money or down payment in escrow until your closing. Those funds will then be applied to your purchase at closing. It is a very common part of purchasing a property and is for your benefit. It assures that those funds will not be touched or missused.

Hope this was helpful

Answer 4

I think you are talking about earnest money. Earnest money is the amount you put up with your contract. It is deposited and held in escrow until closing. It is basically a deposit on the house and comes off the price of the house at closing.

Answer 5

Escrowing more commenly refers to taxes and insurance in the home buying process. Many mortgags companies will escrow your tax payments into the mortage amount, and they can do the same with homeowners insurance. Some people like it, some dont.