How Does an Escrow Account Work for a Land Contract?

Land contracts offer couples unable to qualify for a mortgage a way to buy a house.
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The term "escrow" means to hold something in trust. Escrow is an independent third party hired to hold cash for the buyer and seller -- and keep all parties honest. The process works for anything -- buying and selling homes, boats and airplanes. You can even sell your childhood collection of action figures, although the escrow costs might be more than the price paid for your toy collection. Escrow also offers a formal way to keep everything legal when you buy a house using a land contract. [Fact checking: #3]

Land Contracts

A land contract is one form of sales agreement for real property. The contract, despite the name, must include a house. Land contracts are popular in areas with volumes of property on the market. During times of tough lender requirements, sellers also turn to land contracts to offer credit. Homeowners offering land contracts typically own the property without any mortgage loan. The seller pays for the equity in the property under the contract by making monthly installment payments to the seller to buy the house, much like a traditional loan. Buyers pay a down payment on the property and make monthly payments, including interest and payments for property taxes, to the land-contract seller.

Escrow Process

Land contracts and more traditional real-estate agreements use escrow services, although the service isn't required for land contracts. The escrow officer collects signatures for paperwork and transfers documents between the buyers, sellers, and the title company. The escrow officer has both buyer and seller sign the land contract and the title report, a document tracking the chain of ownership for the property. While typical sales agreements have the seller sign over the grant deed to the property to the buyer during the escrow process, land-contract agreements make the buyer wait until all payments are made until transferring the ownership deed. [Fact checking: #5]

Deposit and Payments

Escrow works the same way for land contracts and traditional sales dealing with deposits and payments. The land-contract seller usually steps in for the lender, including collecting interest, although some contracts use a private lender. The land agreement also includes the number and amount of required payments from the buyer. Escrow transfers the buyer's deposit for the purchase and the down payment -- once all the paperwork is signed by both buyer and seller.

Escrow Transfer

The escrow process offers an important control over a land contract. When the office handles all funds collected and reported as part of the original land contract, both the buyer and seller ensure things are progressing as agreed in the contract. While either the buyer, seller or both must pay escrow for services, an escrow account keeps track of all money paid by the buyer for the house. When the payments total the contract sales price, the seller gives the escrow company the order to transfer the property to the buyer. This transfer happens when the buyer and seller come to escrow to sign the grant deed.

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