Meaning and Uses of Escrow in Homebuying Situations, Part 1

There are several terms that may be new to you if you’re purchasing your first home, and a great example here is escrow. Used for a couple different reasons within a mortgage and homebuying situation, escrow is in place to protect multiple parties – buyers, sellers and even lenders – during such processes.

At Altius Mortgage and our partners with Mortgage Ogden, we’re happy to explain escrow and any other important terminology for any of our mortgage loan options, from ideal first-time homebuyer programs to mortgage refinancing and numerous other areas. In this two-part blog series, we’ll go over everything you need to know about escrow within a homebuying situation, including how it protects both parties and how it’s used.

Understanding Escrow

Simply, escrow refers to any situation within a transaction where a third party holds funds, valuables or other items of value as part of the transaction. Escrow may be used for several different high-value transaction types, but perhaps the most common is within a home purchase.

During escrow in a homebuying situation, money or property will be held by a neutral third party to protect it from potential scammers. The money in question can only be accessed for pre-arranged purposes agreed upon by both the buyer and seller of the home.

Escrow and “Earnest Money”

Escrow use within a homebuying situation ties in directly with a theme known as “earnest money.” Also called a good-faith deposit, earnest money refers to a buyer’s investment in the purchase in question, which should match the seller’s – but they come in different forms.

When a buyer and seller reach a certain point in their negotiations, you see, the seller will generally make their own good-faith move by pulling the house off the public market to negotiate solely with this buyer. This is an investment – putting the house back on the market costs money. In return, the buyer will put down between 1% and 3% of the home’s listed price in escrow. If and when the sale goes through, this money is simply applied to the purchase amount. If the deal falls through, the seller retains the earnest money to cover the cost of re-listing the home.

Types of Escrow

There are actually two types of escrow used during home purchases:

  • To protect the buyer’s good-faith deposit and bring the money to the right party based on sale conditions, as detailed above.
  • To hold a homeowner’s funds in a separate account for taxes and insurance payments, which will be handled by your lender in most cases.

For more on escrow and good-faith deposits during a home purchase, or to learn about any of our mortgage loans or services, speak to the staff at Altius Mortgage today.