What is Escrow?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Escrow refers to money or documents held by a third party for distribution to another party according to specific instructions. Escrow can be used to protect the interests of the involved parties in many types of sales transactions. However, escrow is most commonly used during the purchase of a home.

Choosing a Third Party to Handle Escrow

While escrow laws differ in every state, all states allow attorneys to handle escrow accounts in home purchase transactions. Lawyers usually set up escrow accounts in their own legal practice when accepting retainer payments from their clients, so they are a natural choice by states. All states also allow mortgage brokers and banks to set up escrow accounts. Some states also let real estate agents handle escrow accounts. In states such as California and Arizona, real estate agents are considered capable of handing the entire home purchase from start to finish, including escrow. 

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Understanding Escrow Accounts

Once you have found a home, you will be asked to prove that you have the money to afford it. You can pay for the home with your own cash or obtain approval for a mortgage from a bank. In either case, the funds for the purchase will be placed in a special account known as an escrow account. This account does not gain any interest and the money cannot be used by the bank for any other purpose. It just sits in the account for the required amount of time, which is typically 30 days. Once the escrow account is funded, you are free to begin your inspections. The type of inspections depend on your mortgage company, but most require termite and utility inspections. Once the house passes these inspections and the reports are sent to the mortgage company, you can sign the final documents, including the release of escrow funds to the seller. This document authorizes the seller to remove the funds from the escrow account and give you the key to your home.

Getting Legal Help with Escrow

If you are involved in the purchase or sale of property and need more information about your transaction, you should speak to an attorney familiar with real estate law and the escrow process.

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