Escrow
Escrow refers to a financial arrangement in which documents you sign or deposits you make related to your mortgage are held by a third-party escrow agent. These items are released from escrow only when specific conditions are met. Money held in escrow is typically designated for purposes such as property taxes, earnest money deposits, hazard insurance, and similar costs.
For loans insured by the FHA, an escrow account is required. In the case of conventional loans, whether an escrow account is established is at the discretion of the lender. In addition to collecting monthly mortgage and interest payments, lenders may also gather funds for property taxes and homeowner’s insurance. These amounts are stored in the escrow account and are paid when the respective bills are due. By federal law, mortgage holders are required to send an annual statement to borrowers detailing the activity of their escrow account.
There is also a separate escrow account set up during the negotiation phase of a home purchase. In this case, all funds and documents are held by an escrow officer, who is usually a representative of the title company, until the closing date. It is the escrow officer’s responsibility to ensure that all money and paperwork held in escrow are properly disbursed to the respective parties, whether buyer or seller, at the time of closing.
