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What is escrow? What to know when buying or selling a home

An escrow is an arrangement in which a disinterested third party, called an escrow holder or settlement agent (in this case, First Title Company), holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.


People buying and selling real estate often open a sale transaction with the settlement agent for their protection and convenience. The buyer can instruct the settlement agent to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the settlement agent to retain possession of the deed to the buyer until the seller's requirements, including receipt of the purchase price, are met. Both rely on the settlement agent to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.


Professional escrow settlement services are a convenience for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds and many other items, using settlement as the central depositing point. If the instructions from all parties to the transaction are clearly drafted, fully detailed and mutually consistent, the settlement agent can take many actions on their behalf without further consultation. This saves time and facilitates the closing of the transaction.


Here's what each party does in escrow:


The Seller:

  • Deposits the executed deed to the buyer with the settlement agent.

  • Deposits evidence of pest inspection and any required repair work, if applicable.

  • Deposits other required documents such as tax receipts, addresses of mortgage holders, any state or federal required documentation, etc.


The Buyer:

  • Deposits the funds required, in addition to any borrowed funds, to pay the purchase price with the settlement agent.

  • Deposits funds sufficient for home and title insurance.

  • Arranges for any borrowed funds to be delivered to the settlement agent.

  • Deposits any deed of trust or mortgages necessary to secure loans.

  • Approves any inspection reports, the Preliminary Report for title insurance, etc., called for by the purchase and sale agreements.

  • Fulfills any other conditions specified in the instructions.


The Lender (if applicable):

  • Prepares loan document package for buyer/borrower.

  • Deposits proceeds of the loan with the settlement agent.

  • Directs the settlement agent on the conditions under which the loan funds may be used.


The Settlement Agent:

  • Opens the order for title insurance.

  • Obtains approvals from the buyer on the Preliminary Report/ Title Commitment, pest and other inspections.

  • Receives funds from the buyer and/or any lender.

  • Prorates taxes, rents, etc.

  • Disburses funds for title insurance, recording fees, real estate commissions, lien clearance, etc.

  • Prepares a closing disclosure or HUD settlement statement, as required, for each party, indicating amounts to be disbursed for services and any further amounts necessary to close.

  • Records deed and loan documents, delivers the deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.

  • Issues final closing statement/HUD settlement statement and forwards to buyer, seller and lender.


Source: Chicago Title Insurance Company

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