What is Escrow?

There are two main types of real estate closing for purchases of residential properties. One is the traditional closing and the other is an escrow closing. In traditional closing states, like Colorado for example, the buyer and seller and any other interested parties come to the closing table at the appointed time for the transaction, sign all necessary documents and the transaction is completed. The property title changes hands and the money (lender or buyer’s) changes hands as well. In traditional closing states on a purchase there is one closing and funds disbursement which finalizes the transaction which is generally referred to only as “the closing.”Once the offer is agreed to by all parties concerned, the agent will take the written final agreement and the deposit check and deposit them “in escrow.” Escrow will then be deemed open.

In a state like California the purpose of an escrow is to enable a buyer and seller to deal with each other without risk. Before title to the property can be transferred to the new buyer, the buyer must deposit into escrow all monies necessary to pay for the home. This is most commonly done when the buyer obtains a loan. If all stipulations have been met according to the escrow instructions (created between seller, buyer and lender) the closing is final, all funds are disbursed and the sale is final. The closing is generally referred to as a “closing of escrow.”

Then, the seller must be paid, the seller’s old mortgage paid off, and any other liens on the property must be paid off. All responsibility for handling funds and documents is delegated to the escrow holder, a neutral third party, which is usually a title insurance company or escrow company.

Your title insurance officer can answer many of the frequently asked questions about title insurance, preliminary reports, and alternative ways of holding title to property in Colorado.

The contracting parties deposit funds or documents with the escrow holder, for delivery to the respective parties upon performance of all conditions of the agreement.

Escrow Process

To finalize the sale of the home a neutral, third party (the escrow holder, a.k.a. escrow agent) is engaged to assure the transaction will close properly and on time. The escrow holder insures that all terms and conditions of the seller's and buyer's agreement are met prior to the sale being finalized, including receiving funds and documents, completing required forms, and obtaining the release documents for any loans or liens that have been paid off with the transaction, assuring you clear title to your property before the purchase price is fully paid.

The documentation the escrow holder may be collecting includes:

  • Loan documents
  • Tax statements
  • Fire and other insurance policies
  • Title insurance policies
  • Terms of sale and any seller-assisted financing
  • Requests for payment for various services to be paid out of escrow funds

Upon completion of all instructions of the escrow, closing can take place. All outstanding payments and fees are collected and paid at this time (covering expenses such as title insurance, inspections, real estate commissions). Title to the property is then transferred to the buyer and appropriate title insurance is issued as outlined in the escrow instructions.

At the close of escrow, payment of funds shall be made in an acceptable form to the escrow. As your real estate agent, I'll inform you of the acceptable form.

The Escrow Holder Will:

  • Prepare escrow instructions
  • Request title search
  • Comply with lender's requirements as specified in the escrow agreement
  • Receive funds from the buyer
  • Prorate insurance, tax, interest and other payments according to instructions
  • Record deeds and other documents as instructed
  • Request title insurance policy
  • Close escrow when all instructions of seller and buyer have been met
  • Disburse funds and finalize instructions

The Escrow Holder Won't:

  • Give advice - the escrow holder must maintain neutral, third-party status
  • Offer opinions about tax implications

Mortgage Escrow Account

A Mortgage Escrow Account is established to pay on-going expenses while there is a loan on the house. These expenses include property taxes, home insurance, mortgage insurance, and other escrow items. Generally, the Escrow Account is partially funded at closing and the home buyer makes on-going contributions through their monthly mortgage payment.