The Necessity of an Escrow Agreement
While making a deal, you must ensure the other party meets certain conditions or obligations before continuing the cooperation. You can use a legal document to be on the safe side and avoid fraud. If drawing up contracts is not something you like, follow our guide and learn about an escrow agreement, a contract used often in real estate deals.
Why Would I Need an Escrow Agreement?
An escrow agreement is a contract that defines the terms and conditions of a transaction. A third party, called an escrow agent, keeps the assets until the parties agree upon all details.
Anything that has value can be put in escrow:
The escrow agent keeps the documents related to the agreement and regulates the transfer of funds. Once the parties fulfill the terms, the escrow agent hands over the assets to the entitled party.
To avoid any issues with escrow agreements, always include the following:
- The name of the escrow agent
- Definitions of all crucial terms
- Escrow funds and conditions for the release
- The acceptable use of funds
- Escrow agent’s fees and expenses
- Jurisdiction and venue in case of a legal action
- Signature of the parties involved
When Should I Use Escrow Agreements?
An escrow agreement is useful in various situations, such as:
- Real estate purchases
- Stock market trading
Real Estate Purchases
Real estate professionals use escrow agreements because they facilitate the completion of a real estate transaction. The escrow agent is responsible for the earnest money and documents related to the transaction. He/she distributes all funds and documents when the involved parties close the deal.
Mergers and Acquisitions
A good escrow agreement helps in mergers and acquisitions by protecting the buyer from process-related risks. The buyer can set aside a percentage of the total purchase price and keep it in escrow. If the target company does not meet all the terms of the agreement or withholds crucial information, the buyer will get the money back from escrow.
The sale and transfer of shares in the stock market is another area where an escrow agreement can help. Companies put shares into escrow if they use them as payment in a merger with other companies.
How Long Does the Escrow Process Take?
It typically takes from 30 to 60 days. The timeline varies depending on the buyer, seller, and escrow agent. The factors affecting the duration of the escrow process are:
- State requirements for escrow
- Mortgage pre-approval
- Proper documentation
- Underwriting—The process a lender uses to determine whether to accept or dismiss an applicant
- Time requirements for tasks
If the agreement has no clauses regarding the duration of the escrow, there should be no penalty if it does not close on time.
Who Manages an Escrow Account?
An escrow account is necessary for keeping the money until the parties fulfill all the conditions. Various third parties handle escrow accounts, such as:
- Escrow companies
- Escrow agents
- Mortgage servicers
Escrow Companies and Agents
If you are buying a house, a specialized company or agent can be in charge of the escrow. The escrow company or agent sometimes functions in the same way as the title company, a third party that works for both the lender and the buyer.
Managing the buyer’s deposit and holding onto other documents are some of the duties of an escrow company or agent. The parties usually split the fee for escrow services.
The mortgage servicer manages the mortgage until you pay off your loan. He/she usually:
- Collects the mortgage payment
- Keeps the records of payments
- Manages the escrow account
When the mortgage servicer takes care of the escrow account, you don’t have to send the tax or insurance bills. He/she will let you know how and when to pay.
Your mortgage servicer can be your lender, but that is not mandatory. The mortgage servicer can sell the servicing rights to your loan.
Can DoNotPay Help Me With Contracts?
If all the legal terminology in this article makes you feel overwhelmed, and you are not sure what to do, don’t sweat! We’ve got you covered! DoNotPay can create numerous documents in no time. Here’s how it works:
- Search for DoNotPay in your browser
- Enter the name of the document you’d like to get
- Converse with our chatbot
You’re all set! Our app will generate a personalized document of your choice. Make sure you sign or notarize it to make it official.
The table below summarizes the documents we offer at the moment. Take a look and select the one you need.
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