What is Real Estate Escrow and How Much is It?
Going through the escrow process can be a bit like an obstacle course: You pay to get in, and then there are a lot of hoops to jump through before you end up closing on your home! A good real estate agent can help you avoid the pitfalls. In this article we’ll attempt to give you a preview of the escrow process and associated costs.
So what is escrow?
According to Investopedia, “Escrow is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction.”
That’s about as clear as mud so let’s break it down! Basically, escrow is the idea that a neutral third party should hold the funds in a real estate transaction while the details of that transaction are worked out. In Oregon, the third party in a real estate transaction is always going to be a licensed escrow agent. Most escrow agencies also offer title insurance, and may be referred to as an “escrow” or “title” company.
Escrow agents hold the earnest money. Earnest money in our area is typically 1% of the purchase price of the home and is due quickly after the home goes pending (seller accepts buyer’s offer). The earnest money funds go into a special account called an escrow account, which exists until the home closes or the sale fails.
The phrase “in escrow” comes from the fact that while the home buyer, seller and their respective realtors work through the home sale checklist (inspections, repairs, title search, etc.), the buyer’s earnest money sits in the escrow account. Typically the buyer has multiple ways to have their earnest money refunded if they back out of the deal (multiple contingencies are baked into standard local offer form templates).
Portland Escrow Costs
Home buyers kick off the escrow process by depositing earnest funds into the escrow account. Also known as the earnest deposit, this sum varies with each Portland home sale, but it’s usually equal to 1% of the total purchase price of the home. It is not in addition to the purchase price, but comes directly out of the down payment that will be due at the end of the escrow process. In our area this amount almost never exceeds $10,000, even on a million dollar plus home sale, because to go over 10,000 means if there was a dispute the amount is higher than the small claims court limit.
Once the seller accepts the offer and the earnest money is in the escrow account, no further payments are due until the closing date or right before closing. By closing, buyers need to come up with closing costs as well as the down payment, and their lender (if they are getting a loan) needs to send in their funds. “Closing costs” is a blanket term for all the fees charged by the lender to finance the home and can include title and escrow costs. They might also include your first month of PMI and often pay your property taxes in advance. For a full list of fees that may be included in the closing costs, ask your real estate agent or lender. Bottom line is, closing costs are usually an extra 2-5% of the total purchase price of the home, and unlike the earnest money and down payment, they don’t go toward the cost of the home.
Finally, your down payment is also due at the time of closing. It may be between 3-20% of the total price of the home, depending on the deal you worked out with your lender.
Recommended Portland Escrow Company
We choose Fidelity National Title of Portland! Check out their website for tons of additional helpful information on what escrow is and how to navigate it as a home buyer or seller.
Nervous about escrow? Having an experienced real estate agent on your side will help it all go smoothly! Contact our top 1% sellers and buyers agents today.September 4, 2020