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The Escrow Process

Friday, November 25, 2022   /   by Laura Larson

The Escrow Process

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Escrow is a term you've probably heard if you're a first-time house buyer. However, it's likely that you're now unsure of what escrow actually means. The phrases "escrow" and "escrow account" refer to two distinct tasks in the home-buying process. A neutral third party mediates a real estate transaction through the escrow process, keeping funds and property "in escrow" until the transaction is completed. As an alternative, your mortgage lender manages your annual tax and insurance expenses through an escrow account after you've bought your property.
 
Escrow.
Denotes the custody of a deed, deposit, money, or piece of property by an unbiased third party. These third-party businesses may be an escrow company, a title company, or an escrow-related law firm. These businesses mediate the real estate transaction during the home-buying process and keep funds and the property "in escrow" until all the terms of the purchase and sale agreement have been satisfied. Your mortgage lender will open an escrow account once the deal is finished. Property taxes and homeowner's insurance premiums will be managed in this account and paid on your behalf.
 
What does an escrow account?
Escrow accounts serve two purposes: store homeowners' funds for specific property expenses and safeguard earnest money deposits until all terms of the sale are satisfied. Taxes on real estate and homeowner's insurance often fall under this category.
 
Your lender will make an estimation of the account's annual expenses and use the funds to cover them. They'll pay the bills on time and add a percentage of this to your monthly mortgage payment. This means you won't need to worry about paying large sums in one or two annual lump sums for property expenses. This is handled for you by your lender.
 
You will receive a yearly account statement with the transaction history and any adjustments for the upcoming year from your lender. They may deliver this document on another date, such as the anniversary of the mortgage, rather than the traditional deadline of December 31.
 
Why is escrow important?
Escrow agents are accountable for holding each party to the terms of the home sale. Before the title and money are released, all of the terms of the sale must be fulfilled. Consider the scenario where a serious issue was discovered during the house inspection and the seller agreed to have it fixed, amd you find out that the vendor hasn't completed the repair at the final walk-through. If the problem hasn't been fixed by then, you can put off closure. 
 
The escrow account is of crucial importance for first-time homebuyers. As they must pay property tax to their local government once or twice a year. They are not required to make the entire payment on this account at once.
 
What happens during escrow?
When the seller accepts an offer to buy a property, escrow officially opens. The freshly paid earnest money deposit from the buyer and the property from the seller will both be held by an impartial third party, such as an escrow business. Depending on a number of variables, the initial escrow process can run anywhere between 30 and 60 days. These variables may include issues discovered during inspections, bank holdups, unidentified liens, or any agreed-upon fixes. Your lender will establish an escrow account if all of the terms of the sale have been satisfied by both parties. The monthly taxes and insurance will be paid by the lender using this account. Until the homeowner pays off the mortgage in full or refinances with another lender, the account wil still be active.
 
When does the escrow transaction expire?
When you close on the house, the escrow period for buying a home is over. The closure of escrow is another name for closing. The closing procedure will be organized by the escrow agent, who will also provide the parties with the purchase and sale agreement, lender instructions, buyer and seller instructions, and other paperwork to sign.
 
The escrow agent's service fees are also paid at closing. Depending on the sale, these can be for hundreds to thousands of dollars. Escrow expenses, which include title insurance and lender closing costs, are typically between one and two percent of the price of your new property. Prior to closing, your lender should provide you with a loan estimate. Until you receive the closing disclosure from your lender, the service costs may change. While the funds are transferred to the seller, the escrow agent will transfer the deed to you as the buyer (or, in some cases, to a trustee who holds title throughout the term of your mortgage).
 
You will normally put money into an account to pay 3–12 months' worth of property taxes and insurance as part of the escrow procedure. Additionally, you'll probably pay these sums at closing. Depending on your title company and lender, you may have to pay your insurance company and a local tax collector. They might show up as a down payment on your lender's escrow account or as a combination of the two.
 
Benefits and drawbacks of having an escrow account
Escrow accounts are a wise decision for a lot of folks. It is simple to use, makes saving easier, and is generally worry-free. The benefits and drawbacks of an escrow account are described below.
 
Advantages
* It has an internal savings system. Only once or twice a year, typically, are property taxes required. This implies that you will have to pay your local government many thousand dollars after months of not paying. If you haven't been diligently saving for it, it's simple to find yourself short on cash. Your payments are equalized into the needed, regular monthly installments using an escrow account.
 
* You need to worry less as a result. The bank is in charge of ensuring that your taxes and insurance are paid in full and on time. If any errors are made, your lender is responsible for making things right and paying the penalties associated with them.
 
* Obtaining a mortgage is simpler. If you don't agree to an escrow, many lenders won't provide you with a mortgage. They do it to safeguard their investment. Therefore, you must be ready to accept an escrow account if you want the most options and the best rates.
 
Disadvantages
* You must pay in advance. When interest rates are low, this doesn't seem like a significant deal. But consider the possibility of a money market account with a 5% return. By making regular payments to a lender, you would forfeit that return. In other words, up until the time the real tax payment is due, you could invest your monthly escrow money. What your lender is doing is this. (Note: Check with your lender to see if this is the case in your state; some states demand that your lender pay you interest for the money held in your escrow account.)
 
* It serves as a permanent cushion that you might not need or use. The Real Estate Settlement Procedures Act (RESPA) permits lenders to hold a two-month reserve in your account as a safety net in the event that real estate taxes or insurance premiums increase. This implies that a portion of your funds will remain in the escrow account indefinitely up until the sale of the property or loan repayment. The benefit of the cushion is that should your property tax bill significantly increase, it can lessen or even eliminate the pain of an unanticipated extra payment.
 
* It causes less nimble money management as a result. Imagine that you are successful in challenging your property's assessment and your tax bill decreases. You're going to get some cash back, right? Yes and no. Your lender is required by law to review your monthly payments at least once each year. Consequently, you will eventually receive the money in the form of lower monthly payments or a refund check. But it might not happen for a while. Or, on the other hand, if your tax liability rises by 30%, your monthly payments will significantly increase. If so, you might be required to make an unforeseen lump sum payment. Therefore, don't let the simplicity of an escrow account fool you into thinking you're secure.
 
What would happen if you lacked an escrow account?
Your lender may be able to set up an escrow account to take over making the payments if your loan doesn't include an escrow feature and you forget to pay your homeowner's insurance or property taxes.
 
Additionally, your lender may use lender-placed insurance, also known as force-placed insurance, if you've fallen behind on a tax or insurance payment and don't have an escrow account set up. To safeguard their financial interests, the lender can get home insurance coverage on their own.
 
If you want to learn more, contact Laura Larson to ensure a positive real estate transaction experience.