Escrow and Title are two very important terms in real estate.
They refer to different aspects of the home-buying process. Let’s dive in!
Escrow
Escrow refers to a special type of bank account that holds money for the benefit of all parties involved in a real estate transaction. Money held there can only be accessed by permission from all parties involved. When a buyer and seller agree on the terms of a sale, they usually open an escrow account with a title company or an attorney. This account holds onto the buyer’s earnest money deposit, typically 3% of the purchase price. Later, as the escrow progresses, the escrow holder will collect the other sale-related funds such as the down payment and closing costs. Your escrow agent will make sure that all financial documents are signed correctly and that the grant deed is ready to be transferred to the buyers name. Basically, escrow is a neutral third party that holds your money until certain conditions are met.
Title
Title refers to legal ownership of a property. A buyer is entitled to know that there are no liens, encumbrances, or any ongoing legal disputes that could affect their ownership of the property. So a title company conducts a search to ensure the property has “clear title”. Then they issue an insurance policy to protect the buyer against any future claims or disputes. No federal lender would allow an escrow to close on a property with a defect in title, it would weaken the collateral (the real property) for the loan. There are private lenders that may waive some title issues, but that is not the norm. The escrow process begins when you hire an escrow officer or an attorney. In California we almost always use escrow officers; on the East Coast attorneys are used to oversee the financial and recording aspects of your transaction. The escrow officer or attorney will draft documents necessary for closing, prepare them for a licensed notary public, then send them off to be recorded at local county offices where they become part of public records – and thus part of what’s known as “title”.
Both of these terms (escrow and title) refer to key aspects of a real estate transaction. Escrow holds the funds, and then manages the transfer of the deed for the money paid, and title ensures the documents to be recorded are correct. Then the transaction is completed according to agreed-upon terms. Title insurance gives the buyer clear ownership of the property and protects them against title claims about ownership of the property.
If you’re interested in learning more about real estate transactions, consider working with our firm. We can help guide you through the process of buying or selling so that everything goes smoothly from start to finish.
FAQ
What is escrow, and why is it important in a real estate transaction?
Escrow refers to a special bank account that holds money for the benefit of all parties involved in a real estate transaction. It’s important because it ensures that all financial documents are signed correctly, and the grant deed is ready to be transferred to the buyer’s name.
When is an escrow account opened during a real estate transaction?
When a buyer and seller agree on the terms of a sale, they usually open an escrow account with a title company or an attorney.
What does the escrow holder do during the escrow process?
The escrow holder collects sale-related funds, such as the down payment and closing costs, and ensures that all financial documents are signed correctly.
What is earnest money deposit, and how much is it typically?
Earnest money deposit is the amount of money a buyer puts down when opening an escrow account, and it’s typically 3% of the purchase price.
What is title, and why is it important in a real estate transaction?
Title refers to legal ownership of a property. It’s important because it ensures that there are no liens, encumbrances, or any ongoing legal disputes that could affect the buyer’s ownership of the property.
What is a title company, and what role do they play in a real estate transaction?
A title company conducts a search to ensure the property has “clear title,” issues an insurance policy to protect the buyer against any future claims or disputes, and ensures that the documents to be recorded are correct.
Can a federal lender allow an escrow to close on a property with a defect in title?
No, a federal lender would not allow an escrow to close on a property with a defect in title because it would weaken the collateral (the real property) for the loan.
What happens during the escrow process?
During the escrow process, the escrow officer or attorney will draft documents necessary for closing, prepare them for a licensed notary public, then send them off to be recorded at local county offices where they become part of public records.
What does the title insurance policy protect against?
The title insurance policy protects the buyer against any future claims or disputes related to the property’s ownership.
Why is it important to work with a real estate firm during the buying or selling process?
Working with a real estate firm can help guide you through the process of buying or selling, ensuring that everything goes smoothly from start to finish, and that all important documents and financial transactions are handled correctly.