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Escrow Agent In Real Estate: What To Know

March 25, 2024 4-minute read

Author: Molly Grace

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When many people think of a real estate transaction, they think of two sides: the buyer and the seller. However, there’s also another party involved whose job it is to remain neutral throughout the home buying process. This person is known as an escrow agent. While perhaps lesser known, this neutral player has many important responsibilities, including enforcing agreements made in the contract and safeguarding money.

Let’s dive into what escrow agents do in real estate, including how they help to protect the interests of both the buyer and the seller.

What Is An Escrow Agent?

If you’re planning to sell or buy a home in the near future, escrow (and the agent or escrow company who handles it) will very likely be a part of that. What does that mean?

In a real estate transaction, an escrow agent is a neutral third-party entity who holds onto funds and assets related to the transaction until both parties have satisfied their contractual obligations and the sale can be closed on. An escrow agent may also be referred to as an escrow officer.

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.

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.

Who Is The Escrow Agent In A Real Estate Transaction?

Typically, the role of the escrow agent will be played by representatives from a title company, mortgage lender or an attorney, but it can depend on the laws and customs in your state. Regardless of who it ends up being, you can fully trust your escrow agent knowing they are there to execute the contract and ensure the process goes smoothly.

The Importance Of An Escrow Agent: An Example

To help you better understand the importance of having an escrow agent during the home buying process, let’s take a look at an example in which an escrow agent isn’t present. One adult, Taylor, is selling their home. A buyer, Casey, offers a $10,000 earnest money deposit to Taylor. Instead of putting this cash in escrow, Casey hands it directly to Taylor. They move ahead with the deal, but when it comes time for the home inspection, the inspector’s report turns up with serious issues.

Taylor and Casey both agreed in the purchase contract that if the home inspection showed significant issues, Casey could back out and get their earnest money back. However, Taylor decides they don’t want to abide by this anymore and says that they aren’t going to give the earnest money back if Casey walks away from the sale.

In this situation, having the money in escrow would have made it much easier for Casey to get their $10,000 back. Without an escrow account, Casey would likely have to sue Taylor to try to get their money back.

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The Role Of An Escrow Agent, Defined

Escrow agents perform several critical tasks during the home sale process. Let’s take a closer look at what an escrow agent does and why these tasks are important.

Holds Money In Escrow

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.

Completes Documentation And Oversees 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.

Conducts A Title Search And Issues Title Insurance

Your escrow agent may also be responsible for conducting a title search on the property and issuing a title insurance policy.

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.

Releases Funds And Files The Deed

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.

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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 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 there are some similarities, there are also some notable differences.

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. But 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 only to the trust’s beneficiary (the person who will receive the assets in the trust once the conditions are met).

For example, if you were to set up a trust that transfers ownership of your home to your child on their 18th birthday, your child is the beneficiary, and the trustee’s fiduciary duty is to them, 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 more about your escrow account and how Rocket Mortgage® makes it easy to keep track of escrow and your monthly mortgage payments.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.