An escrow is funds, a deed, or some other sort of collateral that one party gives to another party to complete a portion of the sale process for a home. When you drive by a home with a for sale sign, and see a small plate that declares the house is in escrow, it means that someone has set about purchasing the home. They have not moved in yet, but have transferred over the funds or the documentation to purchase the property. Escrows are very important to a real estate transaction. They make sure that no funds or property will change hands until all of the instructions for the house purchase have been followed.

Basically, the escrow holder has an obligation to safeguard all the money and documentation while he or she still has them, and then to disperse that money or those documents and obtain the title only when all of the provisions of the escrow are complete. An escrow involves the buyer and seller or lender and borrower. Normally a set of escrow instructions are drafted in writing and then signed by both parties and handed over to an escrow officer. This officer is an unrelated, unbiased third party that can enforce any measures on the documents that are not being followed the way that they were intended to be.

If a broker is involved in the real estate transaction, then he will normally contribute to the escrow instructions and help prepare documents. The escrow officer will process the escrow, which will last until all the instructions in the document have been followed. When in escrow, you will probably need to cover property taxes and homeowner's insurance. You'll want to make an initial deposit and then put payments into an account every month. These can be added to your regular mortgage payment. The escrow agent will eventually take the sum of money out of your account when your taxes and insurance premiums are due.

The point of an escrow is simple. By making sure that you pay your tax and insurance obligations before you take possession of the house, the previous homeowner ensures that you will not run into trouble after moving in. This process also has to do with the mortgage company. They want to make sure that you pay your premiums because of the possibility of a disaster. If your house burnt down before you paid the insurance, then your lender would be left with no collateral. Also, if you default on your property tax it may put a lien on your house, which would make the home almost impossible to sell in the future.

Your escrow may also require that you fill out certain documents and deposit those. Each escrow is different, and is a decision that is arrived at after both the buyer and seller assess the situation. Many sellers will get a real estate agent or an attorney involved when drafting the guidelines for their escrow, just to make sure that they don't miss anything. As the buyer, an escrow can help you spread your insurance and tax payments over 12 payments. This benefits you as you balance your financial obligations and move into your new home without any pressing financial burdens.

Once all the financial obligations are met, and the officer has approved all the deposits, then the escrow can be closed. This means that the actual real estate transaction can occur. The seller leaves with his or her money and the assurance that the house has been purchased according to all laws, and the buyer can move in with the assurance that he or she has done everything in the escrow. That way, he or she has honored the banks and the sellers. Speak to a real estate attorney about the escrow process if you have any more questions, or need help drafting the rubrics for an escrow.