If you are buying or selling a property, you are likely to hear about escrow – a common arrangement used to manage funds after an offer to sell a home is accepted. Learn what escrow means and what it typically looks like in real estate transactions, and why it matters to buyers and sellers. Here are some reasons for using escrow accounts, how they work, and their costs.
What is escrow?
In short, escrow is an arrangement between two parties in which money or property is managed by a neutral third party that keeps that money or property safe and manages how and when it is disbursed.
Reasons for needing escrow accounts
At various stages of the home buying process, there are benefits to using escrow accounts (also known as “holding accounts”) for the buyer, and if the home is financed, the lending bank.
Buyer Protection
The first way escrow is commonly used in real estate is to hold earnest money. This is the deposit made by the buyer after signing a purchase agreement, showing a serious intention to buy.
Lender Protection
Another way escrow accounts are used in real estate is by mortgage lenders. After the sale of the home is complete, instead of relying on the borrower to pay property taxes, mortgage insurance, and homeowners insurance on time, many lenders add estimated costs to monthly mortgage payments. The mortgage servicer deposits this “extra” money into the escrow account and assumes responsibility for paying the bills on time.
How escrow works in real estate
Now that we know why escrow is important in real estate, let’s take a look at some details you may encounter in the home selling process.
Using escrow for earnest money
If you are buying a home and are depositing earnest money, ask your real estate agent about their typical escrow process. Some real estate agents and brokers may manage the escrow process on your behalf; you may need to set up the escrow yourself; or the title company you plan to use for closing may handle the deposit.
Using escrow for ongoing taxes and insurance costs
Many lenders require escrow, and in some cases, escrow may be legally required. If your lender requires escrow, the mortgage servicer will manage the escrow account and pay taxes and insurance premiums as they come due.
Understanding escrow statements
Lenders must provide their disclosure documents to borrowers at least three days before closing so buyers can review their financing details and ask any questions. When escrow is included in the loan, these documents will include an initial escrow statement.
Understanding escrow data
You should see the following projections in your initial statement:
- The total monthly amount
- A breakdown of monthly amounts for principal, interest, and escrow funds
- The expected monthly payments from escrow for taxes and insurance
- The expected balance
In the future, you should also receive an annual escrow statement from your provider detailing account activity for the previous year and the current balance, along with projections for the next year. This statement should also specify what will happen to any surplus or how any potential shortfall will be addressed.
If your lender does not require an escrow account
If your lender does not require an escrow account, it’s a good idea to request one. This way, you won’t be surprised or unprepared when it comes time to pay taxes and insurance expenses, which can be substantial. If you need to open your own escrow account, contact the bank of your choice to inform them. They will collect the necessary details and assist you in setting it up.
Cost of escrow fees
When closing day arrives, a portion of the closing costs will go toward escrow fees. Depending on the sale, these fees may be paid by the buyer, the seller, or both.
These fees go
This fee is paid to a third party known as the escrow agent, which the buyer and seller have agreed to use to facilitate the paperwork, closing process, and disbursement of funds. This occurs from the time the purchase agreement is signed until the keys are handed over to the new homeowner. The escrow agent can be a lawyer, title company, or escrow company.
The cost varies depending on location, the escrow agent, and terms of sale. However, common estimates for escrow fees range from 1% to 2% of the home purchase price.
Frequently Asked Questions
What does it mean for a home to be “in escrow”?
“In escrow” is a legal term that means the buyer and seller have signed a purchase agreement and agreed to the terms of the future sale, and an escrow account has been opened to hold the earnest money deposit until the title is transferred to the new owner at closing.
How long does escrow take?
There is no specific timeframe for how long a home must stay in escrow, although the purchase contract usually specifies a closing date. The actual length of time for closing depends on factors such as financing details, property appraisal, title search, inspections, and more. A home is no longer in escrow after all closing documents are signed and the title is transferred to the new owner.
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Source: https://www.thebalancemoney.com/how-escrow-relates-to-your-real-estate-transaction-1798810
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