Escrow Agent: What You Need To Know
Molly Grace5-minute read
May 07, 2021
Picture this: Two kids, Greg and Vivian, are on the playground.
Vivian says to Greg, “If you let me play with your firetruck, I’ll give you my stuffed unicorn to play with.”
Greg agrees and hands over the firetruck, but instead of giving him the unicorn, Vivian runs off with both toys.
In this scenario, the Greg could’ve benefitted from having another kid act as a sort of third-party facilitator of this exchange, taking both toys and ensuring that the firetruck was given to Vivian and the unicorn was given to Greg, fair and square.
How does this relate to the subject of escrow agents? Let’s take a look at how this same concept works on a larger scale among adults who are buying and selling houses.
What Is An Escrow Agent?
In a real estate transaction, an escrow agent is a neutral third-party entity who holds onto the funds and assets related to the transaction until both parties have satisfied their contractual obligations and the sale can be closed on.
Think back to our playground example with Greg and Vivian. If they had gotten another kid to come and help them facilitate their exchange, that kid would have been acting as an escrow agent of sorts, holding onto the assets from both parties and ensuring that both Greg and Vivian have fulfilled their contractual obligations before releasing each toy to its new owner.
In a home purchase, any money that moves between the buyer and seller, such as the buyer’s earnest money deposit, will be held in escrow until the contract allows for the money to be disbursed to the appropriate parties.
This process protects everyone involved in the transaction and ensures that no one is able to just walk away with money or assets that don’t legally belong to them yet.
For example, let’s say Greg and Vivian are all grown up now, and Greg is selling his home. Vivian offers a $10,000 earnest money deposit to Greg. Instead of putting this cash in escrow, Vivian hands it directly to Greg. They move ahead with the deal, but when it comes time for the home inspection, the inspector’s report turns up with serious issues. Greg and Vivian both agreed in the purchase contract that if the home inspection showed significant issues, Vivian could back out and get her earnest money back. However, Greg decides he doesn’t want to abide by this anymore, and says that he isn’t going to give the earnest money back if Vivian walks away from the sale.
In this situation, having the money in escrow would have made it much easier for Vivian to get her $10,000 back. Without an escrow account, Vivian would likely have to sue Greg to try to get her money back.
Escrow agents have a fiduciary duty to both parties involved in the transaction, meaning that they are required to act in the financial interests of both the buyer and the seller and must ensure that the terms of the contract are followed.
Typically, the role of the escrow agent will be played by representatives from a title company or an attorney, but it can depend on the laws and customs in your state.
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The Role Of An Escrow Agent, Defined
As soon as both the buyer and seller sign the purchase agreement, escrow comes into play. Earnest money will be put into the escrow account and the escrow agent will get to work ensuring that everything is in line for closing.
Whoever is acting as your escrow agent will typically be involved in more than just holding onto the earnest money deposit. For example, they may also work to ensure that the documentation related to the buying and selling of the home (and the transfer of ownership of the property) is in line, and that contingencies are met. They may also oversee your closing.
When you’re buying a home, a title search aims to uncover any issues with or claims against the property’s title. The person conducting this search will comb through public records, looking for things like liens or unpaid taxes attached to the property. They’ll also ensure that the seller is the rightful owner of the home, and that they have the right to sell the property.
Once everything is set, closing is completed and all contractual obligations have been fulfilled, the escrow agent will release the escrow account funds to the parties they belong to and file the deed with the appropriate government office for your county.
Who Does The Escrow Agent Work For?
Escrow agents act as neutral third parties in these types of transactions. They serve the contract, 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 Agent Vs. Trustee: What’s The Difference?
If you’re familiar with trusts, you might be thinking that the escrow accounts used for real estate transactions are comparable to trust accounts.
While they are similar in that, with both of these accounts, money is being held by a third party until certain conditions are met – such as until the terms of a purchase agreement are met or until the grantor of the trust dies – there are some key differences that separate these two things.
With a trust, the third party who manages the money or assets within the trust is known as the trustee. This person has a fiduciary responsibility to the trust’s beneficiary (the person who will receive the assets in the trust once the conditions are met) only.
For example, if you were to set up a trust that transfers ownership of your home to your daughter on her 18th birthday, your daughter is the beneficiary, and the trustee’s fiduciary duty is to her, not to you.
However, remember that with escrow, the escrow agent acts as a sort of neutral middleman between both parties involved in a contract, such as a buyer and seller. Their fiduciary duty is to both parties.
The Bottom Line: Trust Your Escrow Agent
As we can see, an escrow agent plays a vital role in home sales and purchases. With such a huge transaction, it’s important to have that neutral third party who can ensure that everything is being conducted according to the contract and that the interests of each party are accounted for during the process.
Curious about how escrow comes into play after closing on a mortgage? Learn about how Rocket Mortgage® makes it simple to keep track of your escrow account as it relates to your monthly mortgage payments.
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