This article examines the real estate concept of ‘what is escrow on a house?’
The process of buying a home can be hard, difficult, and tiresome. You also might not be completely trusting during the whole process. This is where an escrow officer or escrow agent comes. In other words, your real estate agent can get a third party to hold on to your asset or all the funds to be held in escrow as you finalize any real estate contracts, among other things. It’s like having a referee making sure all parties comply and even making sure the lender pays if the buyer is borrowing.
What is Escrow on a House?
Escrow is an arrangement where you include a neutral third party such as an escrow officer or escrow agent in a contract that will hold on to an asset or an earnest money deposit until the contract is complete. The escrow is supposed to be impartial to both the buyers and sellers so that both sides of the contract can comfortably continue with the transaction. To understand what is escrow on a house, we can look at each of the three types of escrow as stated below.
There are 3 types of escrow;
- Real estate escrow
- Online escrow
- Escrow accounts
Real Estate Escrow
This type of escrow applies to mortgage lenders who want to ensure that both parties in the agreement fulfill all the conditions of a contract. You will need an escrow account so that the buyer is protected during the purchase process. Once the purchaser and the lender find the results of the process satisfactory, then the balance from the account will be released on the closing date to finalize the sale, thereby, depositing into the seller’s account or to the bank to pay off the remaining mortgage.
The real estate escrow comes into existence once a signed agreement is delivered to the referee who is supposed to take care of the contract matters and ensure all conditions are met. The conditions may mean a home inspection, disclosures, or goals to be achieved. The buyer must write up a check that will be paid at the end of the process and be refunded if the sale is not successful.
Resource – The Complete Guide to Your Real Estate Closing
There are people who take up online jobs, they need insurance as well, and a sense of protection. This online business is always risky as you are not personally dealing with someone, communication is limited to online methods. For that reason, the account is more valuable to these types of businesses.
You could employ an escrow service and let them take care of your transactions for you. They will evaluate how much the buyer has to deposit or pay, matters on the shipment of goods, inspection details, and others.
Once all the details have been negotiated, now the contract can be finalized and if everything is satisfactory, the money is paid and the contract ends.
Having an escrow account is where the asset or cash is placed by the third-party to ensure its safety for the buyer. They could be used for the monthly mortgage payment, house tax, and insurance.
The escrow account will be used continually after the purchaser had moved into the home to pay for property taxes and the insurance coverage needed for the homeowner. With the escrow account, your lender can put together your monthly portions and place them in another account.
If you have insurance or tax bills to be paid, the lender may use the cash from the escrow account to clear any debts to ensure you meet all the necessary requirements.
Opening an Escrow Account
Once you start the buying process, the escrow company will open an account under their company and collect the buyer’s money or check and place it there for safekeeping. It’s important for a person to open the escrow account to enable him or her to get its benefits.
The escrow company could appoint a lawyer or escrow agent to keep you updated about the escrow account. In some terms, it could be known as a settlement agreement for the house.
In terms of interest earned, the account offers no guarantees to earn interest but any financial institution that holds the escrow payments are to pay interests to the account holders.
The escrow account attracts some fees, the escrow officer may charge a fee or percentage of the final price agreed for the home sale price for the maintenance of the account. After the home is sold, the escrow account will be maintained to ensure that the new homeowner can cover the property taxes and insurance.
The Real Estate Escrow Process
The process begins when an offer for the house is accepted. You will need to deposit earnest money to the account, complete any required documents and close the home sales. During the process, the buyer will be required to deposit a predetermined amount to the bank escrow account.
The cash can be of a certain percentage usually lower than 10%, this is after the offer has been accepted by the owner. The money will remain in the account until finalization of the sale. This is what is called being in escrow, to mean being in limbo. The sale process can be a few weeks to a month-long enough until the sale has been signed off.
Offer and Contract Accepted
As mentioned above, the process will begin once the offer to buy has been accepted. Now the contract will be drafted between the two parties regarding what is to be transpired during the sale process. Information includes could be;
- The balance to be deposited to the escrow account
- The time allowable for the deposit.
- Instructions to be followed
- Documents need for the sale
All these details will remain in the signed contract until all the requirements have been fulfilled. All these things will need to be down accordingly so that the funds can eventually be distributed to where it is needed.
The escrow officer will draw up the purchase agreement that has the closing dates for the sale when the cash will be paid and the contract dissolved for completion.
Escrow After Home Purchase
Once the home has been bought, the mortgage lender will ensure all payments for insurance and taxes have been paid from the account as they will have open access to the escrow account. Most mortgage lenders will encourage you to open the escrow account so that they ensure the house is kept up to date with the bills and payments. Especially when it comes to taxes, the penalty for late payments can be very costly and the house could lose its insurance coverage once the payments don’t remain in the account.
For the escrow account, homeowners can ask for two month advance on the house expenses to be placed in the account at the closing date. The homeowner must inspect the account to ensure it has enough funds to cover these costs, e.g. taxes due for payment on the property and home coverage insurance.
Moreover, the buyer will sign documents to initiate payments to the seller from the account. The escrow will shut down as soon as the title deed has been recorded in the buyer’s name. The legal team has to confirm the deed and affirm you are the new owner and that is the end of the sale.
There are certain critical details about the process that must be upheld to ensure a smooth sale and transition of ownership.
The Account Initiation
As mentioned above, the company will open the account for the cash or asset to be placed in as the sales proceeds.
Once the account is opened, the bank will assign a mortgage agent, but the bank must do its own appraisal before proceeding forward. The buyer will have to pay for this service. The bank will analyze the supposed amount with what is supposed to be there.
If the appraisal from the bank comes lower than the supposed price, the financing will be constrained unless the buyer offers to cover the difference. Another option will be to use the low appraisal amount from the bank which may not be advisable.
Once the bank assigns you a mortgage planner, you will hand out your property address and they will give you a statement on the loan details. Those are the interest rates, amount payable, closing costs plus any other costs. This is the only time you will be able to negotiate prices. After the contract has been signed, it is complete and you must comply.
Approve the Seller’s Disclosures
After the statement has been signed, you should receive a confirmation in writing. You should also receive notification of any problems experienced in the area. This information is usually available during the listing, but it is important you go through them again.
In some cases, the seller may not give out disclosures meaning you will have to do your own inspections and check on any code violations by yourself.
Obtain the Necessary Home Inspection
For all home matters, the home inspection will always come up. It is an extra expense besides what you are covering but it is important you do it. Note that it’s not mandatory or a requirement, just a responsibility you should do to avoid any future regrets plus it’s in your best interest.
Start by getting a pest inspection on the home to check on wood termites, roaches, rats and other pests. Then you can have an environmental check to crosscheck on toxins that may have remained in the house, lead pollution, asbestos, and mold. Also check for other factors like if there are factories in the vicinity, landfills, oil fields or a gas station that may be seen hazardous to the environment.
If you have the cash to keep on with the inspection, you can move to check on geological reports and factors like if there have been earthquakes or damaged soil. Get a flood report, water report, all these are necessary for the home insurance coverage.
After the inspection, there are options you can take like backing out from the sale or renegotiating the prices to allow you to cover the repairs or any other expenses. Some of the fixes in the house may be expensive and you should not exceed your limit.
The homeowner must protect themselves against natural calamities like floods, tornadoes, and others. Until the mortgage paid in full, it is mandatory to have the homeowner’s insurance. You should get good coverage that should not be expensive for you but has good rates. Therefore, do your research and choose the best offer.
Title Report and Title Insurance
This process is done by a title company. As soon as the new homeowner has signed off the contract and the money has been distributed the title comes in next. The report is essential to clearly note the property is now under that person’s name.
Just like getting a new car, insurance is also mandatory to have the title insurance and will protect you and the lender from legal problems in the future during title expeditions. If there are any defects in the future, the seller must solve the issue or forgo the deal altogether.
Resource – Essentials of Practical Estate Law
Having an escrow on a house can be very important for the buyer or seller in many ways. Some of the reasons include;
- Ensure that both parties of the contract keep their end of the bargain regarding the deal made.
- Ensure neutral grounds for the real estate process.
- It will save time for both the buyer and seller regarding matters on the sale.
- The contract reduces liability when there is a neutral third party in the hold of the asset or funds.
Despite the escrow being insurance, it can fail in many ways. There are many unknowns in this as well. For example;
- The escrow agent from the escrow company may not uphold the interest of the contract causing the seller to back out from the deal.
- The house on sale may appraise for less than the actual selling price causing the buyer to cover the difference and if it’s not possible, the buyer has to let go of the deal.
- Financing constraints may come in the midst of the contract.
- The home inspection may not be successful.
So, what is escrow on a house? An escrow on a house is a great insurance policy for both the buyer and the seller. A neutral third party will ensure compliance of contract obligations and protect the interest of the homeowner. For every real estate transaction, it would be safer to have an escrow for the house for all the good reasons.