Escrow: What It Is and How It Works

To “escrow” funds in real estate means to place funds in the hands of a third party by means of a legal agreement until certain conditions have been met. In real estate, escrow is used in two different ways.

In a home purchase, an escrow account is used to protect deposit monies until the fulfillment of the terms of a purchase contract. The earnest money deposit is held in an escrow account until closing, at which time it will be applied to the down payment for the buyer. If the sale were to fail because of buyer default, the down payment funds are likely going to be released from the escrow account to the seller as damages. Sometimes an escrow account will retain some funds after closing until certain conditions are met by buyer or seller.

In lending, escrow accounts are used to hold funds for payment of taxes and insurance by the borrower. Some low-down-payment loans require escrow accounts to ensure payment of these obligations, while some borrowers simply prefer to pay into these accounts on a monthly basis to insure timely payment when due. The lender will incorporate the projected taxes and insurance into your monthly payment and, when received, will set the required amounts aside in your escrow account. The taxes and insurance amounts will adjust when tax assessments and insurance rates change. Escrow accounts do not contain funds for HOA dues or supplemental taxes.

Escrow accounts can be managed by escrow companies, escrow agents or mortgage servicers. The disadvantages of escrow accounts will be higher monthly payments and occasional incorrect estimates of what needs to be held in escrow, resulting in fluctuating monthly mortgage payments.

Call or email me, and I will show you your loan options and determine if having taxes and insurance escrowed is right for you.

Do You Want to Buy a House? Here’s How to Prepare

Preparing to buy a home begins the moment you make the decision to become a homeowner. It may take weeks, months or years to ready your financial status so that you can sign your first purchase offer. To help ensure your eventual success, here are five steps to follow.

Getting your credit in order should be the first thing you do. Pay off student loans and credit cards. Your credit score will go up, and lenders will look favorably at a lower debt-to-income ratio for qualifying. The better your credit score, the better the rate and terms of your loan.

Start saving as early as possible for a down payment. The higher the percentage of the purchase price that you can put down, the more favorable your loan terms will be. Once you pay off your debts, more money can be allocated towards your down payment.

Perform a personal expense audit so you can pinpoint where you can save. It will also help you budget for your housing expenses once you close. Your new-home budget should include maintenance costs and utilities in addition to the mortgage, taxes and insurance. Having reserves will make it easier to qualify for your loan.

Plan for closing costs when you start setting aside down payment funds. Expect your closing costs to be 3% to 5% of the loan amount.

Please contact me for a personal review of your financial status so I can help you prepare to buy a home. I am always here to help, and I am just a phone call or email away.