Escrow plays a crucial role in real estate, serving as a financial safeguard for buyers throughout both the buying process and the life of the loan.
This guide can help enhance your understanding of its basic functions to ensure a smooth purchase and successful homeownership.
What is escrow?
This is a financial arrangement in which a neutral third party, called an escrow agent, holds funds and assets on behalf of a buyer or homeowner until all contractual obligations are fulfilled.
What is homebuyer escrow?
Once a buyer and seller have mutually agreed on and signed a sales contract and a good faith deposit has been provided by the buyer, a third-party representative, such as your real estate agent’s brokerage or a title company assumes the responsibility of holding these funds in escrow. These funds are securely safeguarded until all the specified contract conditions are met. The money is then released at closing and applied toward the buyer’s down payment.
What is homeowner escrow?
Following the completion of closing, lenders typically mandate the establishment of an escrow account as a means to protect their interests over the duration of the loan. This arrangement serves to guarantee the timely payment of property taxes, homeowners insurance premiums, and mortgage insurance premiums (a requirement if your down payment is less than 20 percent). Your lender or mortgage servicer will collect a portion of these expenses from you every month to fund your account. This is also useful if you have a large tax bill or insurance premiums because it can help spread out these costs over the year.
What is a mortgage servicer?
Your mortgage servicer, or originating lender, will manage your escrow account once you take ownership of your new home. One aspect of this is the conduction of an annual review of your account to ensure that there are sufficient funds in it to cover your taxes and insurance premiums for the upcoming year and prevent an escrow shortage. They’ll then furnish you with an escrow statement, which provides an ongoing snapshot of your account. It will include your current escrow balance—the amount currently reserved in your account for upcoming taxes and insurance payments—and your principal balance, and how much you owe on the remainder of your mortgage.
Are there fees associated with having an escrow account?
There are two types of fees you can expect. The first is paid during the homebuying process and is part of your closing costs. These fees cover items such as the recording of the deed and the secure transfer of your funds at closing. The second type is for your mortgage servicer to manage your account. These costs can vary depending on the escrow company and your location, so be sure to discuss them with your lender in advance of purchasing your home.
Is my escrow money refundable if the deal falls through?
The answer hinges on the specifics outlined in the purchase agreement. For instance, if there is an inspection contingency in the contract and an issue emerges during the home inspection, you’ll be able to get your earnest money back in full if you and the seller can’t reach an agreement on how to proceed. Likewise, a contingency related to securing financing or obtaining a satisfactory home appraisal gives you the right to terminate the contract and regain your funds should there be any problem with either one. Nevertheless, it’s important to note that even contingencies come with specific time limits. And if the purchase agreement lacks contingencies and you decide to back out of the purchase, your earnest money will not be refunded.
To ensure you fully understand what escrow entails, speak to your real estate agent and lender to understand the advantages and what you can anticipate as both a buyer and future homeowner.