Amid the stress and excitement of buying a house, it’s important to understand every aspect of the process. Consider this question, for example: What is escrow? Do you know the answer? A lot of people don’t, but if you’re on the journey to homeownership, you should.
Escrow offers protection
Imagine you’ve found the perfect house. You make a first bid, and with a little haggling and back and forth, the seller accepts your offer. Handling the sale of a house involves a hefty sum of money, not to mention mounds of documentation and paperwork that need to be reviewed and signed by both parties. Does the lender simply hand a check to the seller? Does the seller instantly hand over the title? No. Instead, the money is put into a third-party account called escrow.
The process of escrow enables the lender to release the funds when the deed of ownership is recorded to you, the new owner. Escrow protects both the buyer and the seller, ensuring that that neither money nor title changes hands prematurely. The third party involved is typically an attorney or escrow officer. Escrow usually costs about one to two percent of the total price of the home.
Escrow in the homebuying process
Once escrow gets underway, several more things will take place before you’ll be handed the keys to your new house, including the following:
- A home inspection: This is when you’ll hire a professional inspector to make sure your new home’s systems and structure are sound. If there are any problems, your agent can help you renegotiate with the seller to get the problems fixed or reduce the price of the house.
- An appraisal: The lender will require an appraisal to confirm your home’s value. They don’t want to lend you more than the property is worth.
- Final details of your loan: You might need to submit additional pay stubs and other financial documentation. You’ll also need to lock in your mortgage interest rate and points.
- Title insurance and other documentation: Your agent will present you with a lot of documentation. Take the time to look through it all, and if you have any questions, ask your real estate agent.
- Homeowners insurance: Shop around for the best homeowners insurance rates and obtain your hazard and liability insurance.
Even once the transaction is complete, you will likely still be tied to an escrow account. Many lenders require that property tax payments and hazard insurance (the part of homeowners insurance that covers damage and theft) be paid to an escrow account to assure lenders that those payments will be made. This payment is lumped together with the monthly mortgage payment, and then the lender pays the tax agency and insurance company.
If you still find yourself asking, “what is escrow?” contact a mortgage officer today for answers to this and all your other questions.
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