An escrow is an arrangement in which a disinterested third party, usually the title company, holds legal documents and funds on behalf of the buyer, seller, and lender, and distributes them according to the buyers, sellers, and lender’s instructions. An escrow is convenient for all involved because each party can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, documents, and many other items, using the escrow holder as the central depositing point.
The escrow agent is responsible for processing and coordinating the flow of documents and funds, keeping all parties informed of progress, responding to the lenders requirements, coordinating legal document preparation and title work, prorating taxes and other items, preparing the final settlement statement of closing for each party, obtaining proper approval of documents and proper signatures, disbursing funds for title insurance, real estate commissions, line clearances, etc., and recording the deed and other documents.
Escrow payment is the common term referring to the portion of a that is designated to pay for real property taxes and hazard insurance. It is an amount “over and above” the principal and interest portion of a mortgage payment. Since the escrow payment is used to pay taxes and insurance, it is referred to as “T&I”, while the mortgage payment consisting of principal and interest is called “P&I”. The sum total of all elements is then referred to as “PITI”, for “Principal, Interest, Tax, and Insurance”. Some mortgage companies require customers to maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration (FHA) loans, require the lender to maintain an escrow account for the life of the loan.
The monthly escrow payment is calculated by taking the total of all anticipated tax and insurance disbursements for the coming year, and dividing that number by 12. In addition, if the mortgage company requires a minimum in the escrow account (usually no more than double the monthly escrow payment), they may add on a shortage adjustment so that the balance never falls below the minimum balance requirement. If, even at its lowest point, the escrow account has a projected balance greater than the minimum balance requirement, federal guidelines—the Real Estate Settlement Procedures Act of 1973 —require that the mortgage company refund the difference to the customer.
