Escrow is a complex and confusing topic for many people. In this article, we are going to offer a brief explanation of escrow, examine some common escrow subjects, and talk about the benefits of escrow.
A Brief Explanation of Escrow
An escrow is an arrangement among two or more parties, together with a neutral third party. The neutral third party is used to hold money or documents for the benefit of one of the other parties pursuant to an escrow agreement. The necessity for an escrow arrangement often arises when one party’s obligation will not be met until after a transaction’s closing date. Common escrow subjects include:
- A mortgage that is being paid off at a later time.
- An outstanding tax obligation or judgment.
- A matter that is in the process of being negotiated or finalized.
If for some reason the closing date arrives, and a matter that is objectionable to one of the parties cannot be immediately resolved, the title company will step in as a neutral third party and hold funds or documents sufficient to satisfy the outstanding item(s). Those funds or documents are held by the title company (“escrowee”) until such time as the item is actually satisfied or resolved, and if the item is not properly addressed by the responsible party, the escrowee will step in to do so.