June 20th, 2018 7:10 AM by Jackie A. Graves, President
matter where you’re buying a home, at some point you’re going to find yourself
deep in escrow.
(Don’t worry. It’s not as bad as it sounds.) What is escrow? In real
estate, it has several meanings, but they all boil down to your house and your
money being in a kind of limbo.
Escrow is when an impartial third party holds on to something of
value during a transaction.
When you make
an offer on a home, you will write an earnest money check that will be placed
in “escrow.” That means it isn’t going directly to the seller but is being held
by an impartial third party until you and the seller negotiate a contract and
close the deal. You can’t touch it and the seller can’t touch it. It’s in
important because it protects both parties. Say you put down earnest money that
went directly to the seller and then couldn’t reach a final purchase and sale
agreement. You don’t want the seller holding your earnest money hostage as a
negotiating ploy. Likewise, the seller won’t want to sign over the deed to the
home until you’ve paid for it. And you won’t want to hand over cash without the
deed being signed. Escrow ensures everyone gets what they are due at
essentially the same time.
When you are
talking with your mortgage lender, you’ll hear about escrow again. They might
talk about an “escrow” or “impound” account or “reserves.” They may use these
terms interchangeably, and that’s OK because they all mean the same thing. They
are funds held by the lender to make payments for your homeowners insurance and
property taxes. Lenders will collect them monthly along with your loan payment
and then pay the tax and insurance bills when they are due. That’s because your
lender has a vested interest in making sure those payments are made. You may
hear the term “prepaids” as well. That’s money collected in advance for those
bills to ensure they’ve got enough on hand to pay them when they are due.
may hear someone refer to the “closing of escrow.” That’s when your purchase is
completed. A closing or “escrow officer” will oversee the final paperwork and
handle the exchange of funds and recording of deeds. This person, sometimes an
attorney, will ensure that all the money is properly disbursed, that the
documents are signed and recorded, and that all necessary conditions are met
before closing the escrow.
sale may be completed and ownership transferred while funds are still held in
escrow. For instance, if you’ve agreed to let the seller’s family stay in the
house for an extra week until their new home is ready, you would sign a
“rent-back” agreement requiring the seller to pay you a daily rate for the
length of their stay. In the case of such a rent-back, your real estate agent
will likely advise you to have the escrow agent hold back a portion of the
seller’s proceeds until they’ve moved out and left the house in the condition
specified in your contract.
you found something wrong during your final walkthrough of the house.
Maybe the seller agreed to make the repair, but the work couldn’t be completed
by closing day. Money can be held in escrow to cover the cost.
purchasing new construction, you may have funds held in escrow until all work
is complete and you’ve signed off on it.
is closed and all funds have been disbursed, you and the seller will receive a
final closing statement and other documents in the mail. Check the statement
carefully and call the closing agent immediately if you spot an error. File the
statement with your most important papers. You’ll need it when you file your
next income tax return.
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