Does Your Escrow Account Pay Out at the Sale of Your Home?

Before clear title is conveyed to a buyer, funds placed into escrow by the buyer typically pay off outstanding property debts. The seller may have a credit coming from his lender, because of an escrow or impound account. Those funds are sometimes paid back to the seller during escrow, by way of a credit.

Escrow Account

With a typical home loan, the borrower pays a specific amount each month to the lender, to cover interest and principal. When the loan includes an escrow account, the borrower pays a little extra with each payment to cover property tax and homeowner’s insurance. Instead of the homeowner's paying the property tax bill or insurance premium directly, the lender makes the payment, taking the funds from the escrow or impound account. When the borrower sells the property, any funds left in the impound account are returned to the borrower.

Loan Payoff

After a borrower pays off a loan, the lender has a certain amount of days to return any surplus funds to the borrower. The borrower does not automatically get the funds returned when paying off the loan. It may take several weeks for the borrower to receive a check from the lender.

Escrow

Another type of escrow involves a real estate transaction. This is a closing of a real estate transaction through a third party. Documents pertaining to the transaction and funds from the buyer go into escrow; the escrow officer follows the instructions outlined in the purchase agreement. The escrow officer pays off the property’s lien holders from funds placed into escrow, before recording title for the buyer and issuing a payment to the seller. If the seller has funds in an impound account with his lender for property tax and insurance, the lender normally refunds the surplus to the seller after the close of escrow. The seller typically receives a check from the lender a few weeks after escrow closes.

Escrow Request

It is possible for the seller to receive the funds from the impound account early during the escrow process when selling the house, referred to as netting escrow. Instead of the lender's issuing a check for the amount in the impound account, she credits the amount against what the borrower owes her. To do this, the escrow officer must make a request of the seller’s lender to credit escrow.

For example, if the outstanding balance of the seller’s loan is $100,000 and the surplus in the seller’s escrow account is $1,000, the lender may agree to accept a $99,000 payoff, and then credit the $1,000 of the impound account against the remaining balance. While this is possible, the lender does not have to agree; she may demand the $100,000 payoff and issue the $1,000 check directly to the seller a few weeks later.

References

• "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
• Associate Mortgage: FAQ