What do I Need to Know About My Mortgage Escrow

What is escrow?

Escrow, or “being in escrow,” refers to a legal agreement between two parties during a transaction to install a third party on their behalf for holding the paperwork and assets and/or funds, until the transaction is closed. Escrow occurs between the time the seller accepts the buyer’s offer, and when the buyer receives the key.  Here is what you need to know about escrow.

When buying a home you will be in escrow once the seller accepts your offer until the date of closing.  At that time, your real estate agent may collect a good faith deposit from you called earnest money.  The earnest money will act as part of your down payment at closing.  The earnest money is deposited into the closing agent’s escrow account, until closing.  At that time, the closing agent will disburse those funds to the necessary parties.

What are the steps of the escrow process?

  • Open an escrow account.  The closing agent will already have an escrow account set up for this purpose.
  • Have the home inspected and appraised.  It will be your responsibility, with your real estate agent, to schedule a home inspection, but the lender will work on ordering the appraisal.  Since there are requirements surrounding an appraisal, you do not want to order this yourself.  A lender will not be able to use the appraisal if you do.  If the sales price of the home is more than the appraised value, the mortgage lender will not be able to make the loan unless you pay the difference between the sales price and appraised value at closing.  Lenders can only lend on the lessor of appraised value, or contract purchase price.
  • Approve the seller's disclosures.  The seller is obligated to disclose all the known faults of the property.
  • Obtain insurance.  Next, you will need to obtain a homeowner’s insurance quote that will be bound for home coverage just before closing.
  • Receive a title report from your lender.  This will enable you to verify that after closing, there will be no other liens on the property (except what you are financing to purchase the property), ensuring you clear title to the purchase property.  The closing agent will provide a Lender’s Title Insurance Policy that protects the lender in the event of an error on the title report.  You are also able to purchase an Owner’s Title Insurance Policy at closing, for a much lower amount, to protect yourself in the event of an error.  This Owner’s Policy is highly recommended, but it is optional to the buyer.
  • Secure financing.  During escrow, your lender will prepare a good faith estimate, also referred to as a Loan Estimate, which details the loan amount, mortgage interest rate, and the closing costs associated with the purchase.
  • Final walkthrough.  You will want to do this with your agent just prior to closing, to ensure everything is in the agreed-upon condition. 
  • Closing.  During this step, you will pay the remainder of your down payment, and closing costs.  You will also sign all of your loan documents at this time.  When the closing is over, you will be the new owner of the home.

What happens to my escrow account after closing?

After closing on your home, a different type of escrow account is set up for you with your lender.  This escrow account is to pay property taxes and homeowner’s insurance as they come due each year.  Once per year your lender will perform an escrow analysis to be sure the proper amount is collected with your monthly mortgage payments to cover these annual expenses.  Any funds remaining in the escrow account after your mortgage has been repaid in its entirety, are refunded back to you.

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