What Is an Escrow Trust Account?
- An escrow trust account is used by the escrow company to hold some type of value in trust for the buyer and lender. A common example is a deed in trust, in which the escrow company will take the title for the property and hold it on behalf of the lender, which has a claim on the title because of the mortgage, which uses the house as collateral. This allows the escrow company to settle disputes and convey the title to either the lender or the buyer in order conclude business or solve payment issues.
- Other escrow trust accounts are used for payments on key home expenses. New homeowners must make these payments in order to keep mortgage insurance and property taxes current. Because lenders do not want anyone else -- like the local government -- to have a claim on the property they are using as security for the mortgage, they often offer to take charge of these payments themselves. The homeowner makes tax payments and similar items as part of the monthly mortgage payment. The lender then sets these payments aside in an escrow account and pays insurance and tax bills when required.
Foreclosures and Other Processes
- When an escrow account holds a deed in trust, it allows for several processes different from those used for a conventional mortgage, notably when it comes to foreclosure, in which lenders seize a home in order to recover defaulted mortgage payments. If an escrow company holds the deed, it can perform a nonjudicial foreclosure, selling the home itself and giving the money to the lender. This saves considerable time when it comes to moving through the foreclosure process. Alternatively, when a buyer gives the deed to the lender or pays off the mortgage and receives the deed, the escrow company is also in charge of collecting all necessary information and moving the title.
- Laws for escrow accounts differ from state to state, so it can be difficult to identify specifics of how the accounts work, what they can do and what requirements may be associated with them. Many states require notaries and other signatories when creating the account. Others may put controls on how lenders can collect interest payments and use them in paying off property taxes. Some states do not allow nonjudicial foreclosures.