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How Escrow Works

Last updated on: June 7, 2023

Part of the reason people retain legal counsel during the home-buying process is that it can be a very complicated process. Buying or selling a home occurs in stages, and each one is very manageable. It takes a team of people to navigate through the process. That is why you must choose these people wisely—from your realtor to your lender and a New Jersey real Estate Attorney

Next, we want to look at one particular stage of the process: after the seller accepts the offer. There will be a relatively long period, perhaps a few months, that passes in between the seller accepting the offer and the buyer owning the home. Though several key things happen during this period, one critical piece is putting money into escrow.

The Basics

Because of the duration of the transaction, it is unrealistic to expect that no money should be exchanged or even put forth during this time. Think of escrow as a way to split the difference. The seller isn’t receiving money, but you aren’t holding onto it either. 

Your offer is just a formal document. If the seller accepts it, some of the components of that offer come into play. These include earnest money and your down payment. That money goes into an escrow account. This is an account managed by an outside party that doesn’t represent the buyer or the seller. Their job is to hold onto and safeguard the money that goes into it. Ultimately, if the real estate deal is successful, the seller will receive the funds in the escrow account, and the buyer will receive the property.

Why Is There a Need For an Escrow Account?

If this is your first time buying a house, you may not fully understand that there is a significant difference between pre-approval and final approval. Pre-approval can be done in a matter of minutes. Your report, in good faith, how much money you have, make, and wish to borrow. 

Your lender will approve or deny your request based on several factors, namely your debt-to-income ratio. To secure financing from your lender, you must provide all required documentation to verify what you declared in your pre-approval application. An escrow account allows a portion of your payment to be transferred while the seller waits for you to receive final approval from the lender.

Stages in Buying/Selling a Home Description Process
Pre-Approval Initial assessment of financial eligibility based on reported information Provide information on income, assets, and desired loan amount
Final Approval Verification of reported information and confirmation of financing Submit required documentation for verification
Escrow Account Temporary holding of funds during the final approval process Transfer a portion of payment to the seller while awaiting final approval

Escrow Disbursement

In the field of real estate, the process of escrow disbursement holds great importance as it involves the allocation of funds held in escrow to cover expenses such as homeowners insurance, property taxes, and other related costs. In New Jersey, it is common for lenders to require borrowers to deposit funds into an escrow account either during or after the closing of a property transaction, or when property expenses need to be settled.

The task of disbursing escrow funds is assigned to a neutral third party known as an escrow agent, who handles the payment of property expenses when they are due.

These escrow agents bear the responsibility of distributing funds from the escrow account according to their designated purposes. They are strictly prohibited from using the escrow funds for any purpose other than their intended use. For instance, funds placed in escrow by a buyer for mortgage payments cannot be utilized to cover homeowner’s insurance or property taxes, and vice versa. While escrow agents do not earn interest on the escrow funds, they may charge fees for their services.

Although not all escrow arrangements necessitate a written agreement, escrow agents must be diligent in adhering to written disbursement instructions. All escrow disbursements should be carried out in accordance with the specific date and method outlined by the owner of the escrow account. Failing to comply with the agreed-upon terms could lead to legal consequences.

The Matus Law Group

At the Matus Law Group, we aim to provide you with professional legal services while keeping you informed throughout the home-buying process. Buying or selling a home is a momentous occasion in your life. We want to enjoy this time, so allow us to protect your interests. Contact us to schedule a consultation!

Christine Matus

Christine Matus
Christine Matus

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