What Is Escrow and Why Is It Important to Your Home Loan?

Making your first home purchase can be an overwhelming experience. Aside from picking the right home and selecting the ideal home loan, you also have to confront a whole host of technical jargon, acronyms and abbreviations, some of which you are very likely seeing for the first time.

An ‘escrow’, which may sound like a foreign term because it’s typically lumped together with other legal paperwork which all fall under the conveyancing process, is one such jargon that first-time homeowners often have trouble understanding. If this sounds strikingly familiar to you, then you have come to the right place.

This article will cover the following:

  • What is an escrow?
  • Where does an escrow fit when purchasing a new property?
  • Is an escrow agreement really necessary? 
  • What is an escrow account? 

 

What Is Escrow?

A typical real estate transaction involves large sums of money being exchanged between the buyer and the seller. In order to make sure that all the terms and conditions are met before the transaction is completed, there is usually a third party involved in the transaction (a solicitor from a law firm). Just think of the third party as a neutral, trustworthy ‘witness’ to the transaction. In Singapore, the escrow process is regulated under the Conveyancing and Law of Property (Conveyancing) Rules 2011

What is an Escrow Account (or Conveyancing/CVY account)?

Escrow, then, is basically a financial agreement whereby the third party will hold on to the funds in an account that belongs to neither the buyer nor seller. Also called a conveyancing or CVY account, an escrow account requires joint authorisation from the lawyers acting for the buyer and seller in the transaction.  

Once the terms and conditions are met between all parties, the money will be released from the escrow account, and the transaction will be complete. This extra step is necessary because it safeguards the funds involved and keeps everybody accountable. 

Related article: Housing Loans Guide: "Chim" Mortgage Jargon, Compiled and Explained for Beginners

 

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Where Does Escrow Fit When Purchasing a New Property?

Purchasing a new property can be a tedious process for first-time homeowners — and even seasoned homebuyers. However, it can be best summed up like this: it begins with the property you are looking to purchase. After the negotiations are done, you may sign the Option to Purchase (OTP) or ‘Sales and Purchase Agreement’, which are essentially documents that say, “Yes, I want to purchase this property”. After signing, a solicitor will let the Singapore Land Authority know that this specific property is ready to be purchased by you, the buyer. 

Do note that before you sign the OTP, you will need to first secure your home loan. This should be easy if you had already obtained an Approval-in-Principle (AIP), or In-Principle Approval (IPA) previously. If you need guidance and advice regarding financing your property, PropertyGuru Finance’s Home Finance Advisors are happy to help. 

This is roughly when the down payment for the property (a percentage of the purchase price minus the amount paid as the booking fee) is due and an escrow is set up. The solicitor is in charge of drafting and managing the escrow agreement, making sure that the terms and conditions are in place, and ensuring that specific schedules in the purchase of the property are adhered to. These terms typically cover everything from the timely completion of the property to any interest payable at various stages of the construction. 

Once everything is in order, the buyer will receive either a certificate of title, subsidiary strata certificate of title, or a title deed (to say that you own the house), a transfer form (to say that the ownership has been transferred), as well as your very-own set of keys (to open doors). This is also when the funds within the escrow account are transferred to the seller, and the transaction will be officially, finally, complete. 

In the course of your research, you might come across different forms of escrow accounts. For example, some are opened by the law firm, some are jointly owned by the buyer and the seller’s solicitors, and some are run by Singapore Academy of Law’s Conveyance Money Service. Banks, too, have their own escrow-related services. That said, they all serve more or less the same purpose in the process and are regulated under the Conveyancing Law and Property Act.

 

Is an Escrow Account and Agreement Really Necessary?

There are two main reasons why an escrow agreement is important. The first is fairly straightforward: in Singapore, it is the law to have an escrow agreement in property-related transactions. The second reason is that an escrow agreement provides a financial safety net for everybody involved. 

As a buyer, your home is likely going to be the single biggest purchase of your life, so you want the guarantee of getting what you paid for. For example, what if there are existing defects before you even move in? What if extensive repairs are required? What if the seller refuses to rectify said defects? 

Having an escrow agreement ensures that the sellers will follow through with their end of the negotiations. This is also why a third party — neither you nor the seller — holds on to the money until the contract is fulfilled. Not only does this prevent potential disagreements, in the rarest of cases, it also reduces the risk of fraudulent activities. Although this complex topic is certainly good to know about, a law firm manages the entire escrow process for you, so there is no need to worry about its technicalities.

Get the process started by comparing all the home loans available or speaking to our friendly Home Finance Advisors. And for the best information on property financing, look no further than our home financing guides

 

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