We’ve all seen the notices on top of the real estate signs in front yards: In escrow. Although it sounds foreboding, escrow is part of the homebuying process, and it’s designed to protect the buyer and the seller.

The more you know about how escrow works, the less daunting it will seem. Here are some escrow basics to make your homebuying experience go smoothly.

Escrow is basically a third party that will hold the homebuyer’s money and the home seller’s deed until all the paperwork is completed. It keeps all valuable assets with a neutral entity to minimize risks to both sides of the deal until all contracts and agreements have been fulfilled. Those are part of the escrow instructions that need to be followed before escrow can close and money and deeds transfer hands.

For buyers, it’s easier to get money back from neutral third parties than the sellers, if the deal doesn’t work out. New-home buyers need to be sure all deposits and payments go into an escrow account and not into the developer’s account.

Once a purchase price is agreed upon, buyers will submit what is known as an earnest money deposit, which indicates that they are committing to buying the home. Otherwise, buyers could make multiple commitments, costing sellers time and money. Earnest money is usually about 3 percent of the cost of the home. Consider it a down payment on the down payment.

For new homes, buyers will put down deposits, which are determined by the seller and will vary based upon the price of the home. Check with your builder for the escrow deposit amounts necessary to open escrow.

Once the purchase agreement has been signed by all parties and the earnest money deposit received, the seller will submit all the documents associated with the home, and it’s the homebuyers’ responsibility to understand them clearly. Purchase agreements are often lengthy and confusing. Ask your sales representative for a copy ahead of time, so you can be sure you are comfortable with the entire agreement.

Look for the exact sales price and a specific deadline for the developer to transfer the property. If that deadline isn’t met due to construction delays, then the contract should allow you to get the deposit back. If you’re unsure how long you will own your new home, be sure to check whether the contract contains a clause that will prohibit you from selling the house for a few years _ especially if the subdivision is still under development.

Be sure to do a walk-through of the home at least three days before closing escrow and make a list of what needs to be done to the home, if anything. Home builders today deliver homes in very good condition, but sometimes there are items that need to be remedied after the close of escrow. Your customer service representative will walk you through the steps necessary to ensure that these items are completed within a reasonable time frame. Check your purchase agreement for close of escrow conditions included in your agreement.

Be aware that escrow fees vary from company to company. The basic rate is usually 2 percent of the sales price of the home, but firms have different add-ons. In California, the seller selects the escrow company, and fees are negotiated upfront. Buyers usually benefit from this arrangement by getting very competitive escrow fees.

Remember, escrow is a financial tool that will help the homebuying process so everyone will be happy with the outcome.

By Pat Setter, The San Diego Union-Tribune (TNS)