What is Escrow?

Mpj042214800001_1One of the first-time home buyers I’m currently working with just called me with a few excellent questions.  She and her boyfriend have recently made an offer on their next home, with their agent which was accepted.  They now have handsome stack of papers from the escrow company (as if the paperwork from the lender wasn’t enough) that caused some questions.

What is escrow?  The escrow company is a neutral party in a real estate transaction acting on instructions from the buyer and seller.  Typically, escrow is handled by independent escrow companies (privately owned), title insurance companies, real estate companies, mortgage companies, attorneys or banks (not all escrow companies require LPOs or are regulated by DFI, such as attorneys or banks).

Escrow follows the instructions of the purchase and sale agreement, lender and the buyer and seller instructions (you should receive this in a preliminary escrow package before closing and will again at closing).    They clear title (make sure that the property only has what is acceptable by the lender’s standards) and handle the funds from the buyer, seller and lender.

They prepare an estimated HUD-1 Settlement Statement, which is kind of like a balance sheet to the transaction.   (Whenever possible, I review the estimated HUD to make sure it correlates with the good faith estimate.  And, I recommend that borrowers always bring a copy of their good faith estimate with them to their signing appointment).   As LPOs (Limited Practice Officers), they may draft certain documents that have been approved by the Bar Association of Washington to prepare given that the individual preparing these documents are licensed to do so.   In a purchase transaction, some of the most common documents the LPO may prepare are the Statutory Warranty Deed (transfers title from the seller to the buyer) and Excise Tax Affidavit (accompanies all deeds and determines how sales tax is paid by the seller).

The escrow company will also accommodate the signing of the transaction as well.    Some escrow companies have more than one location to accommodate your signing–it’s worth asking if you need it!   Escrow sends the documents to be recorded (deed and deed of trust) to the county.  Once the documents have been recorded, escrow disperses funds to the appropriate parties.

Escrow typically does not handle the transfer of keys (talk to your real estate agent about that) and cannot provide legal advice.

Buyers and sellers typically don’t “see” escrow until their signing appointment and may wonder “why am I paying an escrow fee for?” not knowing all that escrow has done on their behalf behind the scenes.

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