What Does It Mean When a House Is in Escrow?

by Elle Smith, Demand Media
    The escrow process typically takes 30, 45 or 60 days to complete.

    The escrow process typically takes 30, 45 or 60 days to complete.

    You've found the ideal house, and the seller accepted your offer. You're giddy with excitement and want to move in — tomorrow. Not so fast; the escrow process is about to keep you from walking over that threshold, at least for a month or two. When your house is in escrow, there are a number of documents to be recorded and certain conditions to be met before you seal the deal.

    Offer and Contract Accepted

    After a seller accepts the offer to buy the home, the escrow process begins. Escrow includes depositing necessary monies, documents and instructions into an account that is held until all conditions for the sale are verified and complete. The process ensures that no funds are distributed until all terms and conditions of the purchase agreement are met. To keep things fair and impartial, a neutral party with no vested interest in the house — also known as an escrow agent — draws up the purchase agreement and coordinates the closing process.

    Importance

    Escrow protects and minimizes risks to all parties in the real estate transaction, including the lender. For example, the escrow account ensures that the buyer is acting in good faith with his offer, providing evidence of financial ability to the seller and the lender. Escrow protects the buyer by proving that the seller legally owns the house, and that the house has a clear title with no liens or claims from other parties. The escrow process also protects the escrow agent. Once the buyer has placed his earnest money into the escrow account, the agent knows he won’t be doing work for nothing.

    Steps

    The escrow process varies from state to state, but a few steps are commonly undertaken: The escrow officer assigns a number to the account and collects the sales contract, the buyer's earnest money and other instructions related to the sale. These instructions may include contingencies for home and flood insurance, home inspections, repairs the seller must make, or any other steps that the parties must commit to before the sale can progress. Then the buyer orders a title search and buys title insurance to protect himself against unexpected claims on the house.

    Perils and Pitfalls

    Although all parties plan for a smooth and successful home sale, many factors can cause escrow to fail. For instance, if the escrow agent doesn't do his job correctly, the seller can refuse to sell the house. As far as the lender is concerned, if the home doesn't appraise for the loan amount, the lender won't loan more than it's worth. Escrow fails can happen if something goes astray with the buyer's ability to secure financing for the house, or if a defect is disclosed in the inspection process and the buyer decides that the house is not what he bargained for.

    Closing

    When all goes as planned, the buyer must sign a pile of documents, after which monies are funded by the lender and the seller gets paid. Escrow closes when the deed is recorded in the buyer's name.

    About the Author

    Elle Smith has been an advertising professional for more than 25 years. Her work for ABC, CBS and Sony Pictures Television has appeared on radio, on air, in print and outdoors. In addition, Smith has more than 20 years experience in marketing, graphic arts, commercial photography and print production, and is a licensed real estate agent with property management certification in California.

    Photo Credits

    • Digital Vision./Digital Vision/Getty Images