Escrow can be a confusing topic. It is something most people have heard of and have a vague sense of what it is. Escrow is when a third party is granted legal power to hold money or assets until special conditions are met. The purpose of escrow is to reduce the risk for all parties involved in the transaction.
The main reason that people (and mortgage lenders) use escrow is that it adds a layer of security to the home-buying and mortgage processes. Although escrow is used slightly differently at the home-buying stage than it is during the life of a home loan, the principle of holding funds remains the same.
Your mortgage lender might also require an escrow account as part of the terms of your mortgage. In this case, the escrow account holds funds for property taxes and homeowner’s insurance. Lenders will pay your home-related taxes and insurance out of this amount to ensure that your home is not under-insured and that all taxes are paid.
What Is Escrow?
Escrow acts as a neutral third party in a real estate transaction. Pre-closing, escrow’s job is to hold onto money during the transaction before agreed upon actions are completed on both sides. In the case of buying or selling a home, neither the buyer nor the seller has access to said money. Once all conditions are met in the transaction, escrow will make the funds available to close the deal.
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.
After your loan closes, you may have a mortgage escrow account which is a holding account for your property tax payments and homeowners insurance premiums. Your mortgage lender will collect these payments on a monthly basis as part of your mortgage payment, hold them in the account, and then pay the bills automatically on your behalf.
How Does An Escrow Account Work?
Escrow accounts are a part of the mortgage process homebuyers typically cannot avoid. With mortgages, home buyers typically pay a little extra into an escrow account every month, along with their home loan payments.
While a mortgage holder (most typically a bank) collects the principal and interest payments each month, they also can collect homeowner’s insurance payments and property taxes. They will then pay those bills when they come due. They do this because when you borrow money from a lender to finance your home purchase, the property becomes the collateral for your loan. Your lender needs to know that the property is adequately insured so that it can be repaired or replaced if damaged. Likewise, they want to prevent a tax lien being placed on the property if you neglect to pay taxes.
Why Is An Escrow Account Necessary?
After a buyer and seller have agreed on the purchase price for a piece of real estate, the parties must ensure that each party receives the required disclosures and funds, has a right to inspect the property, qualifies for the applicable loan, pays the applicable fees and taxes, and more. This process typically takes at least 30 days, and the first step is to open an escrow account. The end of that process, or the “close of escrow”, involves the official recording of the transfer documents with the County Recorder’s office, and the disbursement of funds to the seller.
Escrow accounts are created to ensure that this process goes smoothly. The escrow company acts as a third party intermediary who receives funds from the buyer, tracks which disclosures have/have not been made by the seller, ensures that all applicable third-party fees (lender fees, inspection fees, etc.) and taxes are paid, and ultimately calculates the final amount that should be disbursed to the seller and whether the buyer is entitled to have any funds returned.
What Is the Benefit of Escrow?
The process of buying a home can seem confusing enough on its own—when you add in the intricacies of the purchase process and settlement, that confusion can seem amplified. But having a neutral third party to handle the paperwork and transfer of funds can be beneficial for all sides of a real estate sale.
Think of it as a buffer between two parties with competing interests. Depending on the specific contracts negotiated, escrow provides a safe space to store vital information while the loose ends are tied up.
Escrow is a required process when you obtain financing, but it is used in cash sales as well. As a buyer, it can be comforting to know that all the transaction details are being coordinated and handled by the appropriate parties.
As a seller, escrow provides a safeguard in the event anything goes wrong with the sale. For example, if the borrower backs out of the sale and breaks contract terms, the EMD may be forfeited by the buyer to the seller.
What Happens at Citrus Heritage Escrow?
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
During the escrow period, the title company coordinates with Citrus Heritage Escrow and begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.
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