Escrow fees can be confusing. While they are not the same as closing costs, they are a part of them. Escrow is an important part of any real estate transaction and protects both the buyer and the seller. Find out more about escrow fees and what you can expect to happen during escrow.
Updated August 14th, 2019
Escrow fees in real estate can be really confusing. This is because escrow fees are a part of closing costs, but are not the same as closing costs.
It's imperative that both buyers and sellers completely understand what escrow is and what role it plays in the successful completion of a real estate transaction.
An expert realtor who has developed relationships with dependable escrow services in your area will be able to explain everything to you so that you are prepared ahead of time and know exactly how much escrow costs.
In the meantime, this in-depth guide on escrow and escrow fees can give you a general idea of what to expect whether you're buying a new house or getting ready to sell yours.
What is escrow?
Escrow will come into play once a buyer and a seller have reached an agreement about the sale of a house as outlined in a purchase and sales agreement. Escrow assures that no funds or property will exchange hands until all instructions for the real estate transaction have been followed and completed properly. Think of an escrow officer as a neutral referee between the buyer and the seller who controls the flow of money by holding it in an escrow account throughout the duration of finalizing a real estate transaction.
Escrow assures the buyer that they can deposit any up-front costs such as earnest money without risk while the details of the sale are ironed out. Sellers are protected from buyers backing out of the sale at the last minute without being at least compensated by the earnest money which is held in the escrow account.
What are the conditions of escrow?
Conditions of escrow are certain obligations listed in the escrow agreement that each party must comply with before the deal can move forward. A real estate transaction can't close until all of the terms have been satisfied by the deadlines in the escrow agreement and both parties have signed the appropriate documentation.
Some of the most common conditions of escrow that must be met before closing in real estate are:
- The buyer's lender does an appraisal and approves financing which is transferred to the escrow account.
- The escrow account pays property taxes, homeowners insurance, and mortgage insurance, if required, on behalf of the buyer.
- The seller completes any repairs that were discovered during the inspection and agreed upon in the purchase and sale agreement.
- The title report shows the title is clear of any liens.
- Title insurance is purchased to protect the buyer and lender of any legal challenges that didn't come up during the title report.
Once all of the conditions specified in the escrow agreement are met, the transaction can move to closing.
How the Escrow Process Works
An escrow process begins after the buyer and seller agree on a sale price. First, a purchase agreement is drawn up between the buyer and the seller when the buyer makes an offer that the seller accepts. Then earnest moneyis accepted by the seller and deposited into the escrow account to be credited towards the sale. The deposit of the earnest money into the escrow account opens the escrow account and begins the escrow process.
When the escrow account is opened, the escrow officer creates an escrow agreement based upon the purchase and sale agreement. The escrow agreement has instructions and conditions that must be met by both parties before the property is exchanged for the funds. Each party follows the instructions laid out by the escrow agreement by the deadlines specified and signs any documents that are required. A closing date is set for the final transference of the title to the buyer or the buyer's lender, and the disbursement of all funds to all parties.
Upon closing, the escrow agent disburses all of the funds to the appropriate parties including the profits to the seller and the seller's agent commission fees. All recording fees and escrow fees are also paid at this time. Once all fees are paid and all legal documents are properly signed, the real estate transaction if finalized and the escrow account is closed.
How much are escrow fees?
Escrow fees are paid during closing and are a part of closing costs. Escrow fees are paid to the title company, escrow company, or attorney overseeing the closing of a real estate transaction.
In some states, a real estate attorney is required to present during closing.
Escrow fees can vary depending upon what you state you live in and what the escrow service charges but are usually between 1%-2% of the sale price of the house.
Some escrow services ask for a base rate and then may have additional add-on fees for additional services required throughout the escrow process. To avoid being surprised, make sure you are working with a good agent who has relationships with local escrow services and will provide you with an accurate estimate of what the final escrow fee will be for you.
Who pays escrow fees?
In most real estate transactions, the buyer and seller split the escrow fees. However, who pays the escrow fees can also be a part of the negotiations decided upon in the purchase and sale agreement.
Before the earnest money is deposited into an escrow account, and the escrow account is opened, make sure that you understand everything in the purchase and sale agreement so that you know who is expected to pay the escrow fees and how much they are.
Get Help from an Experienced Real Estate Agent
Closing can be really confusing. There are so many different types of fees that must be paid, conditions that must be met, and terms negotiated it can make your head spin. Having an expert realtor by your side to walk you through the purchase and sales agreement and the escrow agreement so that you understand who pays what during closing is really important.
A good realtor will make sure that everything agreed upon in the purchase and sales agreement is properly documented in the escrow agreement so that there are no unwanted surprises or unexpected fees that pop-up during closing.
You're better off with a realtor who is experienced in their local market and has developed relationships with escrow officers in your area. A discount full-service realtor can save you money to help with escrow fees.
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Top FAQs About Escrow in Real Estate
What happens when a house is in escrow?
When a house is in escrow, the real estate transaction is in its final stages. Once a buyer makes an offer that a seller accepts and a purchase and sales agreement is drawn up, the buyer will make an earnest money deposit on the house. That deposit opens the escrow account and the escrow process begins.
Each party has different tasks they must complete during this process. For buyers, this could mean securing financing, fulfilling any requirements of their mortgage lender such as paying property taxes, homeowner's insurance, title insurance, and private mortgage insurance. Inspections and appraisals may also happen at this time. Sellers will most likely take the home off the market and make any agreed-upon repairs.
What does it mean when a house falls out of escrow?
A house falls out of escrow when the terms of the purchase contract as negotiated can't be met. This can happen for a variety of reasons. The buyer may not qualify for a mortgage. The home inspection could turn up serious issues that the buyer and seller can't agree on. The appraisal ordered by the lender could come up short leaving the buyer unable to meet the purchase price. Or the title search could reveal hidden liens on the property that must be sorted out before the seller can legally sell the house.
How long does a house stay in escrow?
A house stays in escrow for as it long as it takes to satisfy the requirements laid out in the escrow agreement. As long as there are no additional issues that are revealed during the inspection, the buyer is able to qualify for funding, and the title is clear, a house usually stays in escrow anywhere from 30-60 days. Of course, this can be much longer if unexpected issues do pop-up.
Do you get escrow money back at closing?
Escrow money is the fee paid to the escrow service, title company, or attorney who handles the escrow account and processes. It's not a deposit. Those fees have to be paid to the escrow officer by somebody. Unless the buyer and seller have made their own negotiation about who pays the escrow fees, they usually split the escrow fees down the middle.
What happens to money in escrow if buyer backs out?
If the buyer backs out of the sale, what happens to the earnest money in escrow depends on whether there are any contingencies in the purchase agreement and when and why the buyer backs out. Sellers don't like contingencies in a contract but may agree to them in a buyer's market. The most common contingencies are a loan contingency, an appraisal contingency, and a home sale contingency.
What contingencies say is that if certain conditions aren't met before a certain date, a buyer can back out within the window of time specified and keep the earnest money. Otherwise, if a buyer simply gets cold feet and backs out, the seller is usually entitled to keep the earnest money.