Escrow - Real Estate Terms you should Know
If you're considering buying a home or selling a home, you probably have heard of the term escrow. So what really is escrow and do I need it? If this is your first home some of the terms of a residential real estate transaction can see very confusing. At times, you will be relying on blind faith from your Real Estate agent, attorney or title closer to make the best decision for your real estate transaction. Digging into some of the frequently used Real Estate terms will help you understand your choice, get a clear definition of the terms which will help you make an educated Real Estate decision.
Just to clarify, the word escrow can have a few different meanings so we'll cover the basis of the word in a few different capacities. The one most commonly used is an escrow account. An escrow account is similar to a private bank account that will store funds used for paying your Real Estate taxes and insurance. Every month when you make your mortgage payment a portion of the funds are held and used to pay your taxes and insurance premiums. The alternative to having an escrow account is that you will only pay your Real Estate Taxes two times per year and your insurance premiums can be paid one time or multiple times per year depending on the insurance carrier.
If you chose not to escrow you will be responsible for making those payments on time and the balances can be on the higher side. The pro to having an escrow account is the money is taken out in smaller manageable increments and then paid twice a year on your behalf. If your insurance premiums change, or your taxes increase, your escrow account may be short. Your account is reviewed often every six months and will show any overages or shortages on your payments.
Your monthly mortgage payment may fluctuate depending on those findings. Most people do decide to use the escrow account, as it ensures the payments are properly made on time and saves you extra time making extra multiple payments throughout the year.
Another term is an escrow agent. Depending on the state you are closing in, an escrow agent can have different names (closer, title person, or your attorney). An escrow agent is a neutral third party between the seller and buyer that ensures that all documents are properly handled, signed, and recorded so that the sale is recorded in a properly documented fashion. An escrow agent is not in favor of one party or the other, more so ensuring that the documents are handled in a legal matter.
Entering escrow is another used term when talking about Real Estate terms. Entering escrow can also be referred to as having or receiving an accepted offer, contract or purchase agreement in a real estate transaction. Here is how the process of entering escrow or receiving an accepted purchase agreement looks:
- An offer to purchase has been agreed upon, fully executed (signed) and delivered to the other party involved in the transaction. Everyone has agreed to all the terms and so the contract will now move to an escrow agent, title company or closer to start the closing proceedings. You will also be submitting earnest money funds with your accepted offer.
- When a purchase agreement is executed it will usually contain some kind of contingencies, the usual one will be contingencies that will allow the buyer to complete a home buyer inspection, typically completed at the buyer's expense. A buyer's inspection will unveil any under the surface issues of the property that may not have been revealed during the initial showings or time of the purchase agreement submission. If the property is viewed to be sufficient and in good shape you can proceed on to the next step of the closing process. If the inspection is not up to par, it can also be used as another point of negotiations between the buyer and seller.
- The next step to closing escrow will be the bank contingency. The lender or bank supplying the funds to complete the home purchase will want to complete an appraisal. The appraisal is to give the bank/lender/credit union a second opinion of value and to ensure that the property is worth the amount they are lending. In the event of a loan default, the home will go back to the lender and they will have an opportunity to sell the property.
- Your lender will assist you in getting all necessary documents in order for closing, these can include your tax returns, typically from the last two years, current or recent W-2 forms, 1099's or similar to prove that the amount you stated on your approval still matches your current wages. Depending on special situations they may also ask for a letter of explanation if some sort of blemish shows up during final underwriting. This is also where you will want to search for a homeowner's insurance. Typically, you will get a multi-policy discount if you inquire of your car insurance.
- You will get title insurance, which will ensure that the property being transferred is not owned by another individual and no one else will have rights to the property, the term we use will be unencumbered (or free of all liens or other interest).
- Once a clear to close has been issued by your lender, you will want to complete a final walk through on the property. This will ensure that any repairs requested during the inspection period have been completed as agreed upon, the home is in the same shape as you saw during the purchase agreement and that any personal property items are left as agreed. This is also a time to verify that mechanicals is all still working properly, it's broom clean and in the shape that you expected it to be.
- Prior to closing (3 days prior), you will receive an ALTA statement or settlement statement provided by the escrow agent, title company or closer. The settlement statement will show the expenses to the seller and buyer, and any credits either party are to receive at the closing table. Since your taxes and insurance and possibly HOA dues will be prorated to the day of closing a form of debits and credits will likely show on the statement so everyone is in agreement about who owes what and what amount of money will be transferred between parties.
- Closing - the day everyone has been waiting for! If you're a buyer, you will likely bring your downpayment money in the form of a cashier's check, your driver's license and your social security card.... plus a good strong wrist as you will be signing a good number of loan documents. If you are a seller, you will want to bring extra keys, garage door openers, and any manuals to pass on to the new buyer. If you still owe on your mortgage it is possible that you will need to bring a cashier's check to closing too. If you are expected to take proceeds away from the table you will likely be given a paper check to take to your bank. Some escrow agents, title companies or closers will also allow a bank transfer or wire transfer of the funds to your bank, but check with your escrow agent ahead of time if you want that service. There can also be additional fees for using a wire or bank transfer.
For more tips like these, visit the home buying or home selling section, or reach an experienced Realtor by calling 612-807-4858. #realestateagent #realestateadvice #realestateterms Thank you for reading my Heidi Herda, Real Estate blog, "Escrow - Real Estate Terms you should Know!" 612-807-4858 - Keller Williams Classic Realty