Laws of Escrow Disbursements

by Maggie Lourdes, Demand Media
    Escrows are frequently used when you purchase a home.

    Escrows are frequently used when you purchase a home.

    Have you put money into any type of escrow account? Lenders sometimes require you to put money in an escrow account to pay your property taxes and homeowners insurance. A real estate broker holds your earnest money deposit in escrow when you buy a home. Title companies sometimes hold "water escrows" to pay water bills that come due after closings. Regardless of the purpose of the money, strict rules apply for holding and disbursing escrow funds.

    Escrow Accounts Hold Money in Trust

    Escrow agents are entrusted with your money for specific purposes. Escrow agents may not mix their own money with escrow funds. They also cannot borrow or use escrow money for personal purposes. For example, your real estate broker is in hot water if he uses your escrow deposit for a Caribbean cruise. Escrow agents usually don't earn interest off your escrow funds, but they may charge fees for their escrow services.

    Disbursements Are Made for Specific Purposes

    Your escrow money cannot be disbursed for any other reason than the one you agreed to. For example, a bank cannot take money out of your property tax escrow and apply it to missed mortgage payments. Escrow money also can't be disbursed earlier than you agree. For example, your real estate broker can't disburse escrow money before your property closing if you agreed to disburse it at the time of closing.

    Escrow Disbursements and Written Instructions

    Escrow agents must carefully follow disbursement instructions. Generally, you sign a written agreement when you deposit money in escrow, which states when and how disbursements are made. Akthough not all escrow agreements are in writing, don't be shy about demanding a written agreement before you drop money into escrow. If a disagreement comes about, a written agreement is likely to save you a trip before a judge.

    Special Rules Apply to Real Estate Brokers

    Many states have special escrow rules regarding real estate brokers. In Florida, brokers must deposit escrow funds within three days after receipt. In Michigan, they must be deposited in 48 hours. State laws also require close tabs be kept on escrow accounts. In Illinois, brokers must keep detailed journals of all escrow account activities and each deposit has its own ledger card. Check your state laws to learn about your specific rights regarding escrow funds.

    About the Author

    Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.

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