In the world of real estate, escrow is often seen as a dirty word – another hurtle that needs to be cleared in a field where there are already so many regulations and hurdles. On the other hand, setting up an escrow account is extremely prudent in many ways: by getting a third party to hold an escrow fund to pay out property taxes and home insurance, you're effectively ensuring that these extra costs are distributed fairly between the individual selling the property, and they individual who is purchasing it.
Furthermore, opening an escrow account gives everyone some breathing room to make sure that the i's are dotted and the t's are crossed while the deal is being finalized. Purchasing a home or building is a massive step, so even if you found your ideal property, you still want to take it slow and make sure that you don't get carried away.
Typically, the person who holds the escrow account will be a certified real estate agent, a lawyer or a licensed and bonded escrow agent. This individual will be compensated a very small percentage of the sale of the property (one or two percent) as a reward for paying out the insurance and tax.
Usually a home that is held in escrow is held for some time before the deal is closed, and while this can certainly be frustrating for the buyer, it also encourages the practice of delayed gratification, which is sorely lacking in this day and age. Once the deal finally closes, you can rest assured that everything is in order and that the third party escrow agent (hopefully one with an excellent reputation) has handled the funds well and set things up for a smooth transition.
If you happen to be a real estate agent and you are dealing with a property that is in escrow, you can look into the latest realtor commission advance rates to find out if you can get your advance in the interim. For some realtors, the mention of escrow is anathema because it implies patience and a lot of waiting around. If, however, you show patience and understanding, you will be rewarded greatly with word of mouth and solid recommendations, since the buyer who finally closes on their dream property will be forever more indebted to you.
If you are worried that you will not be approved for the purchase of your house, and that the deal could fall through due to shaky credit, here are a couple of ground rules so that you don't set yourself up for disappointment – escrow can be a frustrating game and you don't want to hang around hoping if you're ultimately going to be rejected:
First of all, the price of the house should be no more than two and a half times your annual income. Any more than this, and paying off the mortgage is going to turn into a nightmare.
Also, make sure that you have 20 percent of the asking price ready to go as a down payment, as this is industry standard.
If you're confident in your credit and your financial holdings, you can go through the pre-underwriting process, so that the sellers see up front that your documentation is all in order.