Escrow agent in real estate: What to know

You might not know what an escrow agent does, but this professional will play a key role when you buy a home and close a mortgage loan. They’ll help by protecting your earnest money deposit and making sure no funds needed for the home sale are disbursed until all parties in the transaction meet their financial and legal obligations.

Unlike most of the other experts involved when you’re buying or selling a home, an escrow agent is neutral, not representing either the buyer or seller.

Understanding the duties of an escrow agent is important during a home sale transaction. Here’s a look at the responsibilities of these real estate professionals.

What is an escrow agent?

If you're buying or selling a home, you’ll encounter an escrow agent. This neutral party holds onto the funds and assets related to the home sale until both the buyers and sellers have met the obligations spelled out in the sales contract.

What does this mean? During a home sale, money often moves between buyers and sellers. An example is the earnest money deposit that buyers make after signing a contract.

This deposit, which usually runs from 1% to 5% of the home's purchase price, shows that buyers are serious about purchasing a home. The escrow agent will protect this money until the home sale closes, at which time this money will usually be used to help cover the down payment or closing costs paid by the buyers.

The escrow agent's job is to make sure that neither the buyers nor sellers receive funds during the real estate transaction that don't yet belong to them.

Escrow agents have a fiduciary duty to both the buyers and sellers in a home sale. They are required by law to act in the best financial interests of both parties.

Who is the escrow agent in a real estate transaction?

The escrow agent in your home sale or purchase will usually be a representative of a title insurance company, an officer working with a mortgage lender, or an attorney. This varies depending on the rules of the state in which the home sale is taking place.

Different states have different rules governing the escrow process and escrow agents. In California, for example, the state's Department of Business Oversight licenses escrow companies. The state also enforces specific requirements governing how the escrow process works and how money in escrow accounts is disbursed.

In New York, though, the escrow process is often handled by title companies or attorneys, not agents who are dedicated solely to the escrow process. In Texas, escrow can be handled by escrow agents or by title companies or attorneys.

The role of an escrow agent defined

Whether you are buying or selling a home, the escrow agent in your real estate transaction will make sure the funds needed to close the home sale are disbursed to the right parties at the right time.

Here’s a closer look at some of the duties escrow agents take on during a real estate transaction:

Holds money in escrow

After buyers make an offer that the sellers accept, the buyers will deposit their agreed-upon earnest money amount in an escrow account. The escrow agent will oversee this account.

Usually, the escrow agent releases the funds from the account when the home sale closes. The buyers can then use this money to help cover their closing or down payment costs.

There are times, though, when a home sale falls through, often after buyers discover costly problems during the home inspection.

If the inspection does turn up problems and the sellers won’t pay to fix them, the buyers might walk away from the deal. If the purchase and sales contract included a home inspection contingency, the escrow agent usually releases the earnest money funds back to the buyers.

Some buyers might also include contingencies stating that they will reclaim their earnest money if they can’t qualify for mortgage financing or if they can’t sell an existing home by a specific deadline. The escrow agent will handle the disbursement of funds back to the buyers in these cases.

Buyers will also receive their earnest money back if the sellers terminate the home sale contract without a valid reason.

There are times when the escrow agent will disburse earnest money funds to the sellers even if a home sale falls through and the buyers don’t complete the purchase. This most often happens when the buyers back out of the home sale for a reason not included in any contingency.

Maybe the buyers must move to a new city as part of a surprise job transfer. They could lose their earnest money deposit because they are breaking the sales contract for a reason not covered by any contingency. Once the buyers back out of the sale, the escrow agent will distribute the earnest money to the sellers.

Completes documentation and oversees closing

The escrow agent in your transaction usually takes on duties in addition to overseeing the earnest money process. The agent might make sure that the buyers and sellers pay all required closing costs. They might also make sure that the many documents involved in a home sale are signed properly by both buyers and sellers and that all contingencies are met.

Many escrow agents, especially if they work for title companies, will oversee the signing of papers and transfer of the home’s ownership on the day that the mortgage and home sale close.

Conducts a title search and issues title insurance

The escrow agent in your transaction might also conduct a title search and issue title insurance.

During a title search, a title company will look for any existing liens on a property. Say the sellers failed to pay their property taxes. The local county government might file a lien on the home. If a title search uncovers this lien, the sellers will have to pay what they owe before the sale can go through.

Buyers might also invest in a title insurance policy. This policy protects buyers if a title search fails to uncover any existing liens against a home. Without this insurance, the new owners of a property might be responsible for paying off any back taxes or other liens that a title search missed, even if those charges were incurred by the home’s previous owners. If buyers do purchase one of these policies, the escrow agent might issue it to them.

Releases funds and files the deed

Once the closing is complete, the escrow agent will release any funds in escrow accounts to the buyers and sellers. The agent will also file the deed of trust to the correct government office serving your county.

A deed of trust is an agreement between the buyers of a home and a mortgage lender. The deed states that the buyers will repay the mortgage loan and that the lender will hold the property's title until the buyers pay off the loan in full.

The escrow agent will file the deed with the right government agency in the county in which the home you are buying sits, usually the County Clerk’s or Recorder of Deeds office. You will also receive a copy of the deed of trust at the closing.

If you lose that copy and need a new one, check with your local County Clerk's office or Recorder of Deeds office for a replacement.

Who does the escrow agent work for?

Escrow agents act as neutral third parties in these types of transactions. They serve the escrow agreement, and as such, they don’t work for either the buyer or the seller. Their job is to make sure the terms of the contract are followed and that everything they do is in the best financial interest of both the buyer and the seller.

Escrow agents do not earn a commission on a home sale. Instead, they are paid a salary by whatever company – often a title company or lender – employs them. Because they are not paid by the seller or buyer, they are not tempted to provide a financial advantage to any party in the sales transaction.

This is a benefit to both buyers and sellers: Everyone in the transaction should want a fair deal. An unbiased escrow agent helps to make this possible.

The importance of an escrow agent: an example

An escrow agent can protect your financial interests whether you are the buyer or seller.

Say you are buying a home. Instead of depositing your earnest money of $10,000 in an escrow account overseen by an escrow agent, you give it directly to the seller.

You and the seller have signed a contract stating that if the home inspection uncovers serious and costly issues, you can back out of the home sale with the seller returning your earnest money deposit. Say your inspector decides that the home’s foundation needs costly repair work and the seller doesn’t want to pay for it. You decide to walk away from the deal, but the seller refuses to return your earnest money deposit.

If you had deposited your earnest money with an escrow agent, you’d probably have a far easier time recovering those funds. If you deposit earnest money directly with the seller, you might have to file a lawsuit against that seller to get your funds back.

But what if you’re selling a home? The escrow agent protects your interests by making sure that the buyers have the necessary funds to close the home sale, that they have signed the right paperwork and have met all the contingencies spelled out in the sales contract. The escrow agent will also hold any earnest money deposits in an escrow account until any disputes between the buyers and sellers are resolved.

Escrow agent vs. trustee: What’s the difference?

A trustee and an escrow agent are not the same, though their jobs do share some similarities.

Both an escrow agent and trustee are responsible for overseeing accounts that hold money until certain conditions are met. An escrow agent oversees an escrow account in which the funds won't be disbursed until the conditions of a home sales contract are met. A trustee oversees a trust, an account in which money is only disbursed after the person receiving funds or assets from that trust reaches a specific milestone.

Say you create a trust that transfers ownership of your home to one of your children once that child turns 18. The trustee overseeing this account makes sure that the ownership of the home is not passed on until your child reaches this milestone birthday.

A trustee's fiduciary duty is to the person or people named in your trust, not to you. That differs from an escrow agent, who is a neutral party working for both the buyers and sellers in a home sale. An escrow agent's fiduciary duty is to both parties in the transaction.

The bottom line: Trust your escrow agent

The escrow agent in your home sale is there to make sure that the funds needed to close a real estate deal are distributed to the right people at the right time. Just don’t expect these agents to pick a side if a dispute arises: Escrow agents are neutral parties in real estate transactions, working for both the sellers and buyers.

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