Here at Solutions, we often get asked by First Time Home Buyers, “What is an Escrow Money Deposit (EMD), and why do you need it?”
In short, during the purchase offer stage, it’s like a deposit that a Buyer puts down to show that they’d like to purchase a property in good faith.
An EMD is only deposited after a contract has been fully ratified (when all signatures and initialing are complete and everything has been agreed to on both sides) – Virginia state law requires that an EMD be deposited within five days of contract ratification.
If you write an EMD for $1,500, for example, you have to be certain that the money is available in your checking account to be deposited into an escrow account by your real estate company (or closing attorney in certain cases).
It’s typically held by the real estate company that’s helping the Buyer, but, in the case of new construction, either real estate firm, the builder or a closing attorney may hold the EMD. The amount put down is deducted from the total amount the Buyer needs to bring to the closing, or settlement.
What exactly is an Escrow?
In Virginia, an escrow occurs when a closing attorney or settlement company (also called an escrow holder) holds the documents and EMD involved in a real estate transaction and ensures that all conditions of the transaction are met.
Escrow also refers to a special account that a lender establishes to hold monthly installments from the borrower to cover property taxes and insurance once the mortgage process begins after settlement.
What does an attorney (escrow holder) do?
An escrow holder is a neutral third party who takes instructions based on the terms of the real estate transaction and, when necessary, the lender’s requirements.
What are the duties of the attorney (escrow holder)?
*Receiving and holding all monies, instructions, and documents pertaining to the real estate transaction.
*Serving as the communication link and liaison between all parties.
*Requesting a preliminary title search to determine the condition of title to the property.
*Requesting a beneficiary statement or payoff demand from existing lenders.
*Holding inspection reports, deeds, and insurance documents.
*Complying with the lender’s requirements in its instructions to escrow.
*Preparing or obtaining the grant deed.
*Prorating taxes, interest, insurance, rents, and other costs related to the property.
*Recording the deed and other documents.
*Requesting the title insurance policy.
*Closing the escrow according to the instructions of the buyer, seller, and lender.
*Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs, title insurance, taxes, recording fees, and other costs.
*Preparing final statements of disposition of all funds.
Key terms and phrases commonly associated with escrow:
Escrow payment – Funds that a mortgage servicer withdraws from a borrower’s escrow account to pay property taxes and insurance.
Escrow analysis – A lender’s periodic examination of an escrow account to determine if the lender is withholding enough funds from a borrower’s monthly mortgage payment to pay for expenses such as property taxes and insurance.
Back-to-back escrow – Arrangements that an owner makes to oversee the sale of one property and the purchase of another at the same time, also known as a concurrent closing
Escrow closing – Occurs when all conditions of a real estate transaction are met and the title of the property is transferred to the buyer.
Escrow Company – A firm that acts as a neutral third party to ensure that all conditions that the buyer, seller, and lender establish in a real estate transaction are met.