The word escrow is thrown around a lot when your working in real estate or if you are in the market to buy a new home. Many different parties end up using an escrow account or escrow protection during the home buying process. Realtors, buyers and sellers use a loose version of escrow after they have signed a contract to buy a home. This comes in the form of escrowing deposit checks, down payments, and/or earnest money. The seller of the home being purchased also puts their home inspection “in escrow” with the buyer and their agent upon completion. Lenders can also request that these checks and documents are escrowed with the lender before the final closing date. Title companies also are
written deposit checks for their services, and some title companies will also hold the initial earnest money or deposit check until the day of closing to be endorsed by the buyer back to the title company. This happens when the deposit money is included as part of the Closing Disclosure or HUD document and used towards the lender’s final numbers.
The second type of escrow service comes after the closing of the purchase of a new home. This involves money saved each month and placed with a trusted third-party to hold until annual payments are made for property tax, homeowners insurance, flood insurance, homeowners association fees, and private mortgage insurances payments. On most loans, lenders require an escrow account in order to ensure that these annual payments are made. If you are an experienced buyer with a lot of equity and credit, you may ask to waive the escrow account and save money for your annual payments on your own. During a closing, borrowers will have several documents to sign which acknowledge the existence of the escrow account, the amount of money taken out each month, when the taxes, insurance, etc., will get paid and how much the lender will keep in the account as a cushion in case payments exceed the amount held in the escrow account.
Escrow is a very useful tool throughout the entire purchase-to-close and after closing process. It ensures an order progression of documents and money from contract-to-close, and then after closing, it offers a convenient way to save money for those annual payments required for homeownership.
