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What is Escrow?

In simplest terms, escrow is an independent third party holding money and documents from the seller, homebuyer and lender, which will be disbursed and distributed based on mutual instructions from the buyers and or sellers (also known as principals) provided to escrow. Depending on where you live, escrow may be more commonly referred to by a different name. For example, in Florida and Illinois it’s known as “the closing process,” on the east coast its often called “settlement,” and in California it’s “escrow.” To learn more about escrow, check out Escrow 101: What Homebuyers Need to Know About Escrow

The most basic meaning of the word escrow is money and/or documents held in trust by an independent third party during the course of a transaction. 

Escrow Officers (also known as Closing or Settlement Agents) have one of the most crucial roles in the home buying process. They gather all funds and closing instructions to execute the wishes of all the transaction parties and ensure that the funds are properly paid out to all service providers, in addition to the seller.

Most commonly, the Escrow Officer is part of the title insurance agency handling the real estate title work for the transaction. When entering escrow (or “closing” or “settlement” depending on where you live), the buyer and seller establish conditions for the transfer of ownership. These terms and conditions (often referred to as closing instructions) are given to the Escrow Officer and they have the responsibility of seeing that the parties’ written instructions are followed prior to closing.

When all the requirements of the contract have been fulfilled, closing can take place. At this time, all documents and outstanding funds are collected and fees — e.g., title insurance premiums, real estate commissions, and inspection charges — are paid. Title to the property is then transferred under the terms of the contract, recorded with the appropriate official, and title insurance policies are issued.

What is the purpose of Escrow? 

The common use of escrow is a neutral third party for the multiple parties involved in a real estate transaction. The escrow officer acts as:

  • Custodian for funds and documents 
  • A clearing house for payment of all demands 
  • An agency to perform the clerical details for the settlement of the accounts between the parties 

That said, no matter what name they go by, these officers or agents all follow the same rules of what they can and cannot do.  

They can…  

  • Serve as the neutral party and the communications link to all those involved in the transaction 
  • Act on written instructions from the buyers and or sellers (also known as principals) and the new lender to the transaction 
  • Request a preliminary title insurance report or commitment to verify ownership and identify listing liens and encumbrances that must be cleared before close of escrow per the agreement between the parties 
  • Request payoff statements for existing liens and encumbrances 
  • Comply with lender requirements, reviews, and processes loan documents 
  • Receive funds from the buyer and their lender 
  • Prepare the deed and other documents as required to close the escrow 
  • Prepare a settlement statement which includes all charges for the transaction 
  • Upon receipt of all closing documents and funds, record deeds and any other documents with the appropriate official 
  • Request issuance of the title insurance policies 
  • Disburse funds as authorized by written instructions and the approved settlement statement 
  • Prepare final statements and sends out final documents to the parties 

They cannot…  

  • Provide legal or tax advice 
  • Negotiate the transaction 
  • Offer investment advice 

This article is part of the Home Buyer Guide and our Home Seller Guide.