Throughout the home-buying process, a trusted and unbiased third party may be required to manage money while you execute certain transactions. This is when the services of an escrow agent come in. An escrow agent owes a fiduciary duty to both parties engaged in the transaction and can only act in accordance with the agreement’s provisions. Let’s take a look at what an escrow agent does and their fee.
What is an Escrow Agent?
An escrow agent (sometimes known as an escrow officer) is responsible for carrying out the provisions of an escrow agreement. Escrow occurs in a real estate transaction when a potential buyer of a home—or the buyer’s lender, generally a financial institution—makes an earnest money deposit in an account related to the agreed-upon price of the home. This money is deposited in the hope that both the house buyer and seller will perform their agreed-upon tasks in order to close on a real estate transaction.
The escrow agent deposits the funds, together with the seller’s deed to the home, into an escrow account for safety. When the terms of the agreement are met, the monies in the escrow account are released and can be applied to the down payment on a house. As a neutral third party, the escrow agent must have no inherent interest in the cash they protect and must fulfil equal obligations to both parties. Although escrow agreements are most commonly linked with real estate transactions, they are also utilized in company mergers, stock purchases, and acquisitions.
Who Employs the Escrow Agent?
In these types of transactions, escrow agents serve as neutral third parties. They carry out the terms of the contract and, as such, do not work for either the buyer or the seller. Their goal is to ensure that the contract’s provisions are respected and that everything they do is in the best financial interests of both the buyer and seller.
What Is an Escrow Agent’s Role in Real Estate Sales?
The escrow agent is involved in the real estate transaction from the time a seller accepts an offer to the time of closure.
When you sign a purchase agreement with the seller, you pay an earnest money deposit to demonstrate to the seller that you are serious about purchasing the home. The agent verifies the money and deposits it, together with the title and other papers, into an escrow account, where it will be kept by the agent or escrow business until both parties satisfy their contractual duties of the sale, such as having the home appraised and obtaining financing.
When the buyer and seller agree that all of the sale terms have been met, the residence is closed. Following the closing, the escrow agent will prepare a new deed that names the buyer as the new owner of the home. They’ll also end the escrow according to the guidelines, which may include returning the earnest money deposit to the home buyer, who can apply it to their down payment or closing costs.
Typically, an attorney or title business will act as the escrow agent for part or all of the escrow process.
When Does an Escrow Account Come in Hand?
- Escrow is widely used in real estate deals for down payments or even to cover environmental cleaning costs.
- As part of the underlying purchase agreement in mergers and acquisitions, a cash holdback clause is frequently imposed.
- Escrow can be used to hold court case settlements.
- When a seller substitutes one investment property with another (a so-called “Section 1031 like-kind” exchange), the proceeds from the sale of like-kind property can be retained in escrow.
What Should I be on the Lookout for in an Escrow Agent?
There are two things to consider: accuracy and speed.
Because certain escrow transactions may need to be setup in as short as a single day, agents must be able to accomplish the necessary activities swiftly. Among these tasks are:
- Choosing and implementing an effective escrow arrangement
- The escrow agreement is being negotiated.
- Obtaining the required compliance documentation
- Accepting deposits and investing them in accordance with the terms of the agreement
- submitting tax returns and disbursing cash
The most important factors to consider when selecting an escrow agent are asset safety, the amount of skill in handling a variety of escrows (including complex transactions), servicing capability, and cost.
Should I Trust an Escrow Agent?
It can be difficult to place a substantial sum of money in the hands of a third party. However, it is the greatest approach to ensure that money is transferred to the correct individual if and when the contract is fulfilled or terminated.
Escrow agents are obliged by a fiduciary duty – not only the highest legal obligation, but also their own ethical obligation – to operate in the best interests of both parties and ensure that the conditions of the agreement are met.
They must give information to both parties as well as the lender involved, and they must strictly adhere to the terms of the escrow arrangement. This is treated extremely seriously. Agents who violate this fiduciary responsibility may be held accountable for any losses, have their certification removed, and face civil legal consequences.
You can request copies or receipts of every transaction and put into the escrow account for further peace of mind.
Escrow Fee Explained
Third parties participating in a real estate transaction incur an escrow agent fee. This fee is held in an escrow account until the escrow agent, attorney, or title firm releases it to the appropriate parties. Here are a few examples of common escrow agent fee:
- Fees and commissions for real estate attorneys
- Mortgage origination fees must be paid to the lender.
- Property taxes and other county levies owing to the municipality
- Profits made by the seller as a result of the transaction
- Premiums for homeowner’s insurance
- Premiums for title insurance
How Much Do an Escrow Agent Fee Typically Cost?
An escrow agent fee typically ranges between 1% and 2% of the home’s purchase price. That implies that if you’re looking at a $200,000 home, the escrow agent costs might cost between $2,000 and $4,000. In addition, the escrow officer may charge a flat fee for its services. However, the exact cost of escrow agent fees will vary depending on the escrow business and the location of the residence.
Who Is Responsible for the Escrow Agent Fee?
Buyers and sellers frequently negotiate who pays escrow costs through their real estate brokers. There is no industry standard, but the most straightforward option is to share escrow agent costs between the buyer and seller. Otherwise, escrow fees may be paid fully by the buyer or paid totally by the seller as seller concessions.
What Is the Difference Between an Escrow Agent and a Trustee?
If you’re familiar with trusts, you might think that escrow accounts used in real estate transactions are the same thing.
While they are similar in that money is held by a third party in both of these accounts until certain circumstances are satisfied – such as until the terms of a purchase agreement are met or until the grantor of the trust dies – there are several major differences that distinguish these two entities.
The trustee is the third party who oversees the money or assets within the trust in the case of a trust. This person’s fiduciary responsibility is limited to the trust’s beneficiary (the person who will receive the trust’s assets if the criteria are completed).
For example, if you create a trust that transfers ownership of your home to your daughter on her 18th birthday, she is the beneficiary, and the trustee’s fiduciary obligation is to her rather than to you.
However, keep in mind that in the case of escrow, the escrow agent serves as a sort of neutral middleman between the two parties involved in a transaction, such as a buyer and a seller. They have a fiduciary duty to both parties.
Escrow Agent Career Path
Step #1: Complete Education Requirements
While there is no specific degree requirement for becoming an escrow agent, many escrow officer or agent positions demand at least a high school graduation. If you are an adult without a high school graduation, you can obtain an equivalency diploma such as a GED. The GED exam can be difficult and time-consuming to prepare for, but many community colleges and other adult education institutions offer extensive GED preparation programs.
A major in finance, accounting, or business management would be great for a career as an escrow officer if you want to get a college degree. Enrolling in a certificate program or receiving training from professional organizations such as the American Escrow Association are other choices (AEA). To educate aspiring escrow agents, the AEA offers a variety of courses, conferences, and seminars. These introductory seminars introduce students to the fundamental functions of an escrow agent. Instruction on how to do title searches, prepare final paperwork, and formally witness the signing of all essential legal documents may be included.
Step #2: Acquire Relevant On-the-Job Competencies
Most businesses prefer escrow agents who have some experience in the sector. An internship or entry-level admin job, such as a receptionist or escrow assistant, at a title insurance firm or real estate office can also help an aspiring escrow agent build basic skills and understand what it’s like to work in this role. Receptionists usually answer phones and perform clerical tasks. Escrow assistants work under supervision to analyze preliminary reports, gather information for escrow agreements, open title agreements, manage closing files, and handle any post-closure difficulties.
As an escrow officer, you must be proficient in the use of industry and office software, as well as efficient communication with customers and coworkers. A clerical training course can teach you to common office tasks and equipment if you have never worked in an office before.
Step #3: Meet All Eligibility and Licensing Requirements
Escrow agents are required to be licensed in the majority of states. The rules and regulations governing licensing criteria and license renewals differ from one state to the next. Passing an escrow officer or agent licensing examination and submitting a state-mandated license fee are typically required steps in the licensing procedure.
In California, all escrow agents who provide escrow services are either “licensed” or “controlled” escrow corporations. The Department of Business Oversight licenses licensed escrow companies (also known as independent escrow companies).
Step #4: Find a Job as an Escrow Agent
After acquiring some escrow experience and becoming licensed, you can start looking for a job as an escrow agent. Escrow agents can work in a range of fields, such as real estate, bank loans, and bulk sales. These agents will provide escrow instructions, receive and review preliminary reports, open the title order, calculate expected closing expenses, prepare settlement statements, disburse funds, and ensure that the transaction complies with state and federal requirements. Some escrow agents start their own businesses after working for another organization for a while.
Step #5: Advance Your Career Through Certification
Certification validates your professional skills and makes you a more valued employee. Various organizations, including the American Escrow Association, state-run escrow groups, and some title corporations, offer voluntary certification. The requirements for certification differ depending on the rules of the certifying organization. In most cases, the certification candidate must have recent escrow experience and pass a certification exam.
Conclusion
As we can see, an escrow agent is essential in the sale and purchase of a home. With such a large transaction, it’s critical to have a neutral third party who can ensure that everything is done according to the contract and that each party’s interests are taken into account throughout the process.
Escrow Agent FAQs
Is escrow a trust?
On the surface, a trust account and an escrow account are the same thing. An owner deposits payments through a third party as a deposit or prepayment for a specific item, such as mortgage insurance. However, the phrase can also apply to a trust account that has been established for estate planning purposes.
What is escrow in a mortgage payment?
Your mortgage servicer manages an escrow account, which is essentially a savings account. Your mortgage servicer will escrow a portion of each mortgage payment to satisfy your projected property taxes as well as your homeowners and mortgage insurance premiums.
What is the difference between escrow and trust account?
An escrow account maintains cash that will be used to pay expenditures related with the purchase of real estate, whereas a trust account holds funds that the account owner intends to deliver to beneficiaries when he dies.
