Throughout the home buying process, it’s common for buyers and sellers to need a trusted and neutral third party to handle money while certain transactions are completed.
This is where an escrow agent comes in.
An escrow agent, by definition, safeguards money or assets and enforces escrow agreements in financial transactions – particularly those involving real estate. An escrow agent has a fiduciary duty to both parties involved in the transaction and can only act in accordance with the terms of the agreement.
Let’s take a closer look at what escrow agents do for both buyers and sellers during the home purchase process.
What Is The Role Of An Escrow Agent In Real Estate Sales?
Once you sign a purchase agreement with the seller, you pay an earnest money deposit, which shows the seller you’re serious about purchasing the home. The escrow agent ensures the payment is accurate, then places this deposit – along with the title and other paperwork – into an escrow account, where the agent or escrow company will hold it until both parties fulfill their contractual obligations of the sale. These obligations include getting the home appraised and securing financing.
When the buyer and seller agree that all sale terms have been met, they close on the home. Upon closing, the escrow agent will create a new deed, listing the buyer as the new owner of the home. They’ll also close the escrow per the instructions, which may include releasing the earnest money deposit back to the home buyer, who can put it toward their down payment or closing costs.
Usually, an attorney or a representative from your title company or lender will complete part or all of the escrow process as the escrow agent. And, if your escrow agent works for the title company, they may also be responsible for performing a title search to uncover any liens or issues with the property. This further benefits both parties and helps ensure you’re able to close on the property without issue.
Keep in mind that regulations determining who can act as an escrow agent vary from state to state. If you’re not sure who to work with, speak with your real estate agent or lender. They’ll be able to explain what you can expect and where your money will go.
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Should You Trust An Escrow Agent?
Escrow agents are bound by a fiduciary duty – not just the highest obligation created in law but their own ethical obligation as well – to act in the best interests of both parties and make sure the terms of the agreement are fulfilled.
They must disclose information to both parties and the lender involved, and they must follow the instructions of the escrow contract explicitly. This is taken very seriously. In fact, agents who breach this fiduciary responsibility can be held liable for any loss, have their certification revoked and face civil legal consequences.
For even more peace of mind, you can ask for copies or receipts of every transaction and deposit into the escrow account.
The Difference Between A Trustee And An Escrow Agent
People often use the terms escrow agent and trustee interchangeably, but, while they have similarities, they aren’t the same. Both escrow agents and trustees hold money or other assets in a designated account until they’re instructed to disperse them.
However, the difference lies with the fiduciary responsibility of each.
Who Does The Escrow Agent Work For?
The escrow agent works on behalf of both the buyer and seller in a real estate transaction. They’re legally and morally required to fulfill their fiduciary duty and manage the escrow funds and assets in the escrow account according to the terms of the escrow agreement.
Who Does A Trustee Work For?
While an escrow agent has the duty to act in the best interests of both parties, a trustee must act in the best interests of the beneficiary, exclusively. This means they’re only able to represent a single party at any given time. Keep in mind that a trust may have more than one beneficiary, and the trustee must manage the holding and distribution of the assets in the account for the beneficiaries alone.
How Escrow And Trusts Are Used
Typically, escrow is used to hold assets until both parties meet the terms of a contract. In real estate, this happens when both the buyer and the seller close on the home sale.
With a trust, assets are usually held until one of the following happens:
- A certain event, like a death, marriage or birthday occurs
- A designated time is reached
Trusts can be used to manage real estate, but they more commonly help oversee the distribution of assets to individuals. Many people use trusts to ensure equitable distribution of money after they pass away.
The Bottom Line
With real estate transactions, a great deal of money is typically passed from one party to another. To help avoid risk and ensure all responsibilities of the sale are met, an escrow agent handles the transaction and keeps the money safe through the process while working in a neutral position that’s in the best interest of both the buyer and seller.
As for real estate transactions and different steps in the process, it may be helpful to consult your attorney for more information and direction on how to proceed.
But if you’re ready to start looking at properties and making offers on homes that fit your needs, you’ll need to find a great mortgage lender to help you finance the purchase.
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Miranda Crace
Miranda Crace is a Staff Writer for Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University, where she studied PR writing, film production and film editing. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.
