When you buy or sell a home, escrow is the process that transfers the home from the seller to the buyer. A neutral third party oversees this process.

That third party can be an escrow company, a title company or a real estate attorney. They work with all the parties involved in the transaction to collect all the paperwork and funds necessary to close the deal. The escrow process typically takes 30 to 60 days.

The first key function of this settlement firm is to protect the financial interests of the buyer, seller and lenders by collecting the documents required to close the sale. The parties to the transaction typically must acquire the following:

• Purchase agreement, stating the terms the buyer and seller have agreed upon.
• Termite or pest report, stating that the property is free of wood-destroying insects.
• Natural hazard disclosures, stating whether the property is subject to flooding, earthquakes or other risks.
• Title insurance policy, stating that the property is free of encumberances such as tax liens and can be cleanly transferred to the buyer.
• HOA documents, if the property belongs to a homeowners association.
• Good faith estimate and estimated closing statement outlining the transaction costs the buyer will be responsible for. (Use our mortgage cost calculator to estimate the transaction fees you’ll be charged.)
• Loan documents providing the buyer with the funds needed to acquire the home from the seller.

The second key function of the settlement company is to protect the financial interests of the buyer, seller and lenders by collecting and disbursing funds to the correct parties at the correct times.

For example, after the buyer and seller sign the purchase agreement, the company holds the buyer’s earnest money, a deposit of several thousand dollars that ensures the seller that the buyer is serious about completing the transaction.

If the buyer backs out of the contract for an illegitimate reason, the settlement company makes sure the seller gets the earnest money as compensation for the costs of having taken the property off the market.

The settlement firm also collects the buyer’s down payment (see our calculator, How much of a down payment do I need?) and makes sure the mortgage loan proceeds aren’t disbursed to the seller until all of the paperwork that the buyer’s lender requires is complete.

Once all buyer and seller have met all the sale conditions, they sign the closing documents to release the loan proceeds and transfer ownership of the property.

Escrow then disburses the funds it has collected to the appropriate parties, including the seller or seller’s mortgage company, the buyer’s mortgage broker or loan officer, the buyer’s and seller’s agents, the county and the buyer’s homeowners insurance company.

The transaction is recorded at the county registrar’s office, the seller releases all rights to the property and the buyer takes possession. The settlement company then conducts a settlement analysis and refunds any excess money the buyer deposited with escrow that wasn’t necessary to close the transaction.

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