Laws of Escrow Disbursements

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.

When you entrust an escrow agent with your money, you do so for a specific purpose. To protect you and ensure that your money is available for its intended use, the law prohibits escrow agents from mixing their personal money with your escrow funds. The law further prohibits your agent from borrowing or using your 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.

An escrow agent cannot disburse money from your escrow account for any reason other than the one you agreed to. For example, a bank cannot take money out of your property tax escrow account and apply it to missed or late mortgage payments. It's also against the rules to disburse escrow monies earlier than agreed. Your real estate broker can't, for instance, disburse escrow money before your property closing if you agreed to disburse it at the time of closing. Once the rules of your escrow account are set, all the involved parties have to play by them.

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 will occur. Although 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. If you do have to go to court, your agreement will clearly tell the judge what terms the parties had agreed to.

Many states have special escrow rules for escrow agents and real estate brokers. In Florida, for example, brokers must deposit escrow funds within three business days after receipt. In Illinois, escrow agents have only one business day to deposit escrow funds they receive. Brokers in the state must also keep detailed journals of all escrow account activities, maintaining a separate ledger card for each account. Check your state laws to learn about your specific rights regarding escrow funds.