What Is Escrow and Why Is It Needed?

What Is Escrow and Why Is It Needed?

By Brian O’Connell | The Street

Homebuyers, especially first-time homebuyers, may not fully understand the issue of escrow and how it relates directly to a home purchase.

But understand it they should, as escrow plays a vital – and protective – role in the home-buying process and thus needs to be thoroughly understood by homebuyer and seller alike.

What Is Escrow?

While escrow is typically linked to real estate, it can extend to other major financial transactions.

In a major financial transaction between two parties, escrow is defined as an impartial third party that holds a valuable asset (usually cash) until the transaction is complete.

Mainly, there are three types of escrow – real estate escrow, online escrow and escrow accounts:

Real estate escrow

Mortgage lenders typically insist on a real estate escrow account for the buyer prior to the purchase, before any home inspection or disclosures on the home’s condition are completed. Once the buyer and the lender knows the property is in satisfactory condition, the money from the escrow account is released on the home purchase closing date.

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