How Does Escrow Work in a Residential Real Estate Transaction in Illinois?
When negotiating to buy the house of your dreams, it is your real estate agent’s job to introduce you to the many tools available to keep your investment secure and protected throughout the home-buying process.
One such tool to protect your interests in a residential real estate transaction, whether you are the buyer or the seller, is an escrow account.
What is an Escrow Account?
An escrow account, which is basically a holding tank for the assets you plan to use to buy a house, is tied to a contract that specifies what the buyer and seller must each deliver in order to complete the real estate transaction. An escrow account can also be used if there are questions or unknowns about upcoming taxes or special assessments.
When studying up on the escrow process, keep these keywords in mind:
This term refers to how you take ownership of the property you’re buying. The “vesting term” refers to the fact that the seller has absolute right of title as well as ownership rights until the transaction closes.
Earnest money deposit
Typically there are two deposits a homebuyer makes during escrow. Earnest money is a deposit made to a seller indicating the buyer’s commitment to the transaction.
A report is compiled by the title company, based on a search of county records, to issue title insurance, and uncover any liens against the property, which are then listed as “exceptions.”
Below are more facts about escrow accounts that will shed further light on the home-buying process in Illinois:
Eight Facts to Know About Escrow*
Escrow is a complicated topic — but to understand the fundamentals, there are a few things Chicagoland buyers and sellers should keep in mind:
The buyer, seller, and attorneys work together to draft the terms of the escrow agreement.
Most parties like to agree to an escrow amount of at least 3-5% in order to determine the buyer’s level of seriousness.
The escrow officer—typically the listing company—holds the paperwork and deposits while the buyer and seller work out the details of the transaction.
After an offer has been accepted, the buyer will place an initial deposit (known as earnest money, or about 1% to 2% of the purchase price) in this escrow account.
Once the due diligence period is complete (also known as the attorney/inspection period), a second earnest money deposit is made by the buyers, typically totaling anywhere from 3%-20% of the sale price.
If a buyer backs out of a sale (without a legitimate reason), the earnest money may go to the seller. If the sale is canceled by the seller (or the seller’s actions), the buyer’s funds will be returned to them.
Escrow is not complete until all the terms have been settled and all the parties have signed the necessary documentation.
An escrow closing marks the end of the real estate transaction and represents the legal transfer of title from the seller to the buyer.
Overall, before entering into an escrow agreement, it is important to read the contract very carefully. Your attorney and real estate agent are there to make sure that you understand every word of the agreement and that all of your interests are taken into consideration.
The most successful escrow agreements are those that are thoroughly understood by all parties involved.