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What is an Escrow Settlement?

Article Details
  • Written By: Mary Elizabeth
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 April 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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An escrow account is an account in which some property — generally money or securities — is held until a condition is met or an event occurs. The holder of the escrow account is a third party who holds the property in trust and is referred to as an escrow agent, settlement agent, or escrow holder. The escrow agent acts on behalf of both the buyer and the seller so that they are both protected in a transaction. An escrow settlement refers to a transaction in which an escrow agent is used.

Escrow agents are often used in the domain name aftermarket, in which domain name registrations are transferred, but they are most often associated with the sale of real estate, for which an escrow settlement is the norm. The escrow settlement begins with the seller agreeing to the purchase offer made by the buyer. The buyer’s earnest money is collected by the buyer’s agent and deposited in an escrow account with the escrow agent. The buyer is able to give instructions to the agent to disburse the funds only upon the satisfactory completion of certain terms and conditions. Likewise, the seller can give instructions in an escrow settlement to make sure the deed is retained until certain criteria, like receipt of the purchase price, have been met. It is the responsibility of the escrow agent to inform the parties of any contradictory or impossible instructions in an escrow settlement.

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After the earnest money has been deposited, the bank offering the mortgage conducts is property appraisal. Assuming that the buyer has been preapproved for a mortgage, the buyer will then secure financing. The stipulated financing contingency is removed from the purchase agreement, and the seller makes disclosures. Next come inspections, which may include a home inspection, a fire safety inspection, a pest inspection, a flood report, and an environmental inspection, which provides the information necessary for the buyer to purchase hazard insurance.

The title report and securing of title insurance are the next order of business. Sometimes in an escrow settlement, the escrow agent and the title agent are the same. The final walk-through follows, and if all is satisfactory, the HUD-1 form, which states the final terms of the loan and closing costs, is delivered to the buyer, who should compare it to the original estimate. The closing process is the closing of the deal and the closing of the escrow account. After all papers are signed, the escrow agent prepares a deed identifying the buyer as the property owner and the down payment and loan funds are transferred to the seller. When the buyer has the deed and the seller has been paid, the escrow settlement is over.

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