How Does the Escrow Process Work?


Quick Answer

The escrow process is when a buyer's earnest money is held as part of a property sale and closing, SFGate reports. A buyer typically pays the property taxes and property insurance out of separate escrow accounts established at the point of closing.

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Full Answer

When a potential buyer makes an offer on a piece of property or a home, the buyer generally puts 1 to 2 percent of the purchase price in an escrow account in order to protect the interests of the buyer, states Realtor.com. If the buyer does not fulfill his obligations under the purchase contract, he can lose the money in escrow. If the closing goes through as contracted, the money goes towards the purchase price.

Many mortgage lenders require that the property buyer includes installments towards the property taxes and insurance in the monthly mortgage payments, SFGate reports. The payments to the taxing authority and insurance agency are only made a couple of times per year, so the monthly installments are deposited into an escrow account until the payments are disbursed. When the closing takes place, buyers usually deposit money into escrow to cover the first payments and maybe an added month or two as a cushion, SFGate says.

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