You’ve likely heard the term ‘escrow’ before. But do you know what it really means? If you answered ‘no’, you wouldn’t be alone. Most first-time (and even some experienced ones) are unsure of this term and how it can impact them.
That’s why we’re here to outline everything you need to know about escrow.
An escrow is essentially a contractual arrangement where a third party receives, holds, and disburses money (or property) until the defined conditions have been met. For example, when buying a home, the money may be held until the purchase agreement has been fulfilled.
Why It’s Used in Real Estate
Money or property that is being held in escrow actually works to protect both parties during the process. That’s because it holds it in a protected account throughout the terms of the agreement.
Plus, placing money or property in escrow helps to protect the buyer by ensuring that the third party will get their money to the right place. And all in accordance with the conditions of the sale.
In real estate, there are two main types of ways escrow can be used. The first is during the homebuying process (to ensure that the money is in safe hands) and the second is so that it can be used throughout the life of the loan (for taxes and insurance).
Escrow for Home Buying
When buying a home, an escrow account will typically be set up to hold the deposit. This deposit will then sit in the account until the conditions of the sale have been met and the transaction closes. Only then, will the money in escrow be applied to the down payment of the property.
However, it is important to note that there are times when money can be held after the sale of a property is complete. When this occurs, it is known as an ‘escrow holdback.’ Holdback will occur if something has gone wrong with the sale, like the seller pushing the move-out date back or the buyer finding something wrong during an inspection.
Regardless of how long it can sit in the account, the money will be there until the sale is finalized and all the conditions of the sale are met.
Escrow Throughout the Loan
The second reason why buyers get an escrow account is to establish a way to pay for taxes and insurance during the lifespan of the loan. This is often done by the lender who will take a percentage of the monthly mortgage payment and hold it until tax and insurance payments are due.
Given that this amount changes based on premiums and bills, lenders will determine how much you will need for an escrow payment on the previous year’s bills. With most requiring a minimum of two months’ worth of extra payments to sit in the account.
These accounts will also be audited regularly so lenders can be sure they are not collecting too much or too little. And if it’s found that you’ve been paying too much you will be eligible for an ‘escrow refund.’ However, if it’s determined to be underpaying, expect to be on the hook for the difference.
One of the biggest (and most obvious) benefits of an escrow account is that buyers, homeowners, and lenders will be protected during a real estate transaction.
For buyers, an escrow account is used to protect the deposit. This is needed in case the sale falls through (for example if there is an issue found during the home inspection.) In this instance, the deposit would have been sent to the seller, and there may still be a chance they don’t return it. But, with the money in escrow buyers can rest assured that it will be.
For owners, having the money held in an escrow account alleviates the pressure of having to come up with the money all at once to pay for taxes and insurance. Instead, these payments can be spread out throughout the year.
This means owners won’t have to manage all the due dates or worry if a premium was missed. Instead, the servicer will make sure all payments are made on time.
So, if you’re still curious how an escrow account can impact the buying process, consider getting in touch with us at New Door Property Transfer. We’re ready with years of industry experience to step in and ensure your home buying experience is a good one. So, call us at 610-549-4129 or email us anytime at firstname.lastname@example.org today.