Escrow is a word you never really hear until it comes time to buy a house. So, what is it? In real estate escrow is a financial agreement in which a third party holds payment during a transaction. This payment may include money, documents, and other assets. The third party or escrow provider is neutral. It is neither the buyer nor the seller.  This third party holds and regulates payment in order to make the transaction more secure. It makes the transaction more secure by holding payment until both buyer and seller have completed their agreed upon obligations. The escrow provider is there to ensure that the transaction moves forward smoothly. Once all obligations have been met by buyer and seller they will safely disburse any held money, documents, and assets. Having a better understanding of escrow can help you minimize risks and move forward more comfortably when buying or selling your home.

How it Works

In real estate, escrow begins once you have found your dream home and the seller has agreed to your offer. At this point, both you and the seller will agree upon an escrow agent. This escrow agent will be a mortgage loan officer, a real estate lawyer or a professional title agent. Once this is agreed upon you’ll need to deposit earnest money into the escrow account. These funds show the seller you are serious about the home purchase and capable of making it through to closing. Typically, this earnest money is 1-3% of the sale price of your home. In return for the earnest money, the seller agrees to take the home off the market. They will also make it available for inspections, provide disclosures, and carry out agreed upon repairs. 

Once you’ve reached closing, the earnest money will be subtracted from the amount owed to the seller. It can be used toward the deposit and/or closing costs. If the seller fails to complete repairs or any other agreed upon terms the money can be held from them. The money in escrow can cover the costs of those repairs or obligations for you. If for one reason or another the deal falls through, you will be charged a cancellation fee but you will get your money back.

Homeowners Escrow Account

It is common for lenders to require you to have an ongoing escrow account after you purchase your home. This protects you from losing your home and protects them from losing their investment. This account is used to ensure payment of property taxes and insurance premiums, such as homeowners insurance and mortgage insurance. When you make your monthly mortgage payment, part of your payment goes toward your mortgage and interest. The other part of the payment goes to the homeowners escrow account. When your insurance and taxes are due the escrow service uses those funds to make payment.  A mortgage calculator can help you estimate what the entirety of these payments may be.

If you pay more than is needed into your homeowners escrow account the mortgage company will issue you a refund check. Overpayment may also result in a reduction in the amount of your future monthly mortgage payments. If too little has been paid into the account to cover taxes and insurance, you will be expected to pay the difference. Your mortgage company will send you a bill. Underpayment may also result in an increase in the amount of your future monthly mortgage payments. 

Bottom Line

The purchase of a home is typically the largest investment you will make in your lifetime. When dealing in such large sums of money, escrow is vital. Escrow is the safety net for all parties involved during the process. It protects the buyer, seller and lender.  Peoples Choice mortgage can answer any further questions you have about escrow. We can help you through the home buying process so you can be comfortable and confident in your dream home.