For many people, purchasing a home is one of the largest financial transactions in their lives. To ensure that the payment is processed safely, most real estate companies require the money to be placed in escrow, which is a secure account typically managed by an escrow agent. Here's a guide to help you learn more about this important aspect of real estate law before purchasing a home.  

What Is Escrow?

Escrow accounts are used in a number of legal processes as a way to leave control of a sum of money to a third, impartial entity. That way, the two main parties—in this case, the home buyer and seller—can work out the closing process while the money is still inaccessible. Both parties have to reach an agreement and settle on the conditions of the purchase before the money leaves the account and ends up in the seller’s hands. Most importantly, escrow ensures that both parties feel that the situation is being handled fairly, without one party having power over the other.

How Does It Work?

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At the beginning of the home-buying process, escrow serves as a holding area for the buyer’s good faith deposit, which is the sum of money they offer the seller to show that they are serious about buying the house. That way, the seller is less likely to consider signs of interest and offers from other homebuyers. Usually, the deposit is around 1% to 2% of the home’s final purchase price. If the buyer decides to back out of the sale, the seller may be able to keep this money. 

Later, the escrow account can be used to hold a percentage of your first mortgage payment. Once you start living in the house and owing money towards your homeowners insurance and property tax payments, your mortgage lender can simply pay these additional costs by having the money transferred out of the escrow account. Taking care of these expenses through escrow ensures that you don't miss any deadlines or payments, which can otherwise lead to liens on your home and additional fees.


If you’re beginning the homebuying process and would like a legal professional on your side, turn to Lee, Livingston, Lee, Nichols & Barron, P.C. of Dothan, AL. Since 1948, this real estate law team has helped local buyers and sellers feel confident about their transactions. To learn more about their long track record and wide range of practice areas, visit their website. To schedule a free consultation, call their real estate law team at (334) 792-4156 today.