Whether you are buying a house or selling one, the world of unfamiliar terminology can be both confusing and overwhelming. For many, escrow is one of the trickiest concepts to understand. While most people have a general idea about what escrow means, few completely understand why this critically important process can make or break their home buying experience.

 

What is Escrow?

Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.

 

1. What Does it Mean to be “In Escrow”?

The term escrow is one you will hear frequently when you are buying or selling a home. The escrow account is where all of the documents and monies associated with the sale of the property are kept until closing. The escrow account is in place until the closing process, and after closing, the escrow account is kept in place to hold the money necessary to pay property taxes. A house that has yet to be transferred from seller to buyer is considered “in escrow.”

When the seller of a property accepts an offer from a buyer, the process of escrow begins. This process includes depositing necessary funds, documents, and any special instructions into the escrow account for safekeeping until the closing occurs. The closing cannot occur until both the buyer and seller have met whatever obligations are required of them This ensures no funds are distributed until everything regarding the sale of the home is in order. An escrow agent is in charge of monitoring progress of the things that need to be done, and facilitating the closing when all obligations have been fulfilled.

 

2. What is an Escrow Account?

Think of an escrow account as a savings account; a savings account that only your loan servicer has access to. Mortgage lenders typically insist on a real estate escrow account for the buyer prior to the purchase, before any home inspection or disclosures on the home’s condition are completed. Often, escrow is required for any home purchase to occur. With real estate, both property and money will be considered “in escrow” before the deal goes through.

Once the buyer and the lender know the property is in satisfactory condition, the money from the escrow account is released on the home purchase closing date.

 

3. Who Manages An Escrow Account?

Escrow accounts may be handled by a variety of third parties, including an escrow company, escrow agent or mortgage servicer. Where you are in the process will determine who manages the account. With the purchase of a home, chances are you will end up using a local title company. This will help you ensure you have all of the paperwork you need to avoid problems throughout the sale. A title and escrow company goes beyond merely holding the money. It also conducts title searches to make sure the transfer is legal and takes out title insurance for the property. This type of company will hold all funds necessary for closing in an account and ensure those monies are used as they were intended.

4. How Much Goes Into My Escrow Account at Closing?

As part of the closing costs, lenders often ask buyers to put in two months of estimated property taxes, mortgage insurance payments, and homeowners insurance payments. This serves as a cushion. Sometimes you have to pay the entire first year of homeowners insurance up front and immediately start making escrow payments for next year’s bill.

5. Is an Escrow Account Required?

Almost always, because it protects the lender’s investment. The only loan programs that require an escrow account are the USDA and the FHA loan programs. Conventional and VA loans do not mandate escrow accounts, but most lenders will advise you to have one if you are making less than a 20% down payment.

While they are technically not required, lenders want to protect their interest in your home. If you are delinquent on property taxes, the government can foreclose on your house even if your mortgage payment is current. Adding risk to the lender, these unpaid property taxes can take priority over a mortgage loan if you default.

But an escrow account offers two big pluses for you too:

• You are automatically putting money away for these expenses each month instead of having to budget for a few big payments
• Someone else is managing those tax and insurance bills for you

6. Will an Escrow Account Affect My Credit?

Yes, if the account is delinquent more than 30 days, we may report information about your account to the Credit Bureaus. Late payments, missed payments or other defaults on your account may be reflected in your credit report.

 

7. Can I Earn Interest on My Escrow Account?

In California, the answer is yes. Even though most states do not require lenders to pay interest on escrow accounts, California does. However, there can be exceptions for legal reasons, so consult with your trusted real estate experts!

 

8. Will My Escrow Payments Ever Increase?

Yes but your escrow payments can go down too.  A property tax increase can cause the change. If the tax rate goes up, so can the assessed value of your property. Your homeowners insurance premium can go up too, but probably with much less impact.

Likewise, if your tax rate or the assessed value of your home drops, your escrow payments can also drop. Escrow payments are usually analyzed once a year. Since the amount going into escrow is an estimate, sometimes there is an adjustment, and you get a little back or owe a little extra.

9. What if There is a Mistake in My Escrow Account?

On rare occasions, a mistake can leave an escrow account way short on what a homeowner owes. While it might not seem fair, the homeowner is responsible for full, on-time payment regardless of who is at fault for the error.

Here are a few things to keep an eye on:

• At closing, watch for math errors and confirm that the right tax rate is being used to calculate your property taxes
• Make sure you understand how property taxes work in your area; your local government’s website should have rates and contact info for the assessor’s office
• Pay attention to your tax and insurance bills and due dates, even though you’re not paying the bills directly
• Your mortgage statement shows both the balance of your escrow account and how much of your current mortgage payment is going into it; check it to make sure you’re on track to cover your bills and that any payments due went out

 

WHY CHOOSE CITRUS HERITAGE ESCROW?

When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.

Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200