Escrow is a significant part of buying and selling real estate. Whether you’re a real estate investor, a first-time home buyer, or anyone else who wants to get involved in real estate, you should know the basics of escrow in real estate and how it works.
This article discusses escrow in real estate and why you should choose Leading Edge Title of Central Florida for your escrow and title needs.
What Is Escrow in Real Estate?
Generally speaking, escrow refers to an account that’s held by a third party who has funds before the terms of a transaction are met. Escrow accounts often come into play during the process of buying and selling a home or paying homeowners insurance and taxes.
In a real estate transaction, the trusted third party oversees the transaction. It ensures all conditions are met, then releases the funds to the seller once the transaction is complete. Another way to think of escrow is like a bank account—you can use it to store money until the third party authorizes its release.
Escrow agents (or title agents) play a crucial role in the process, since they oversee the transfer of title upon the sale of a home. That’s why choosing a reputable title agency is so vital if you want to have a smooth real estate transaction.
Important Things to Know About Escrow
As a homeowner, you probably won’t spend a lot of time thinking about escrow, but there are still a few things you should know.
- Protection – Escrow protects both the buyer and seller in real estate transactions. It also helps homeowners pay their property taxes and homeowners insurance each month.
- Timely payments – Without escrow, it would be very difficult for your lender to pay your taxes and insurance on time. Escrow ensures your money is there and there are no issues in making the payment when it’s due.
- Headache-free process – Your lender is required to pay these expenses for you, so you don’t have to worry about scrambling at the end of the year trying to make your property tax or insurance payments.
- Shortages – The payments you make for your homeowners insurance and property taxes are estimates and may fluctuate. For example, property taxes are known to increase over the years, resulting in a shortage requiring you to pay more.
- Payments should be factored into projected mortgage payments – Many first-time homebuyers forget that part of their monthly payment is allocated for taxes and insurance. You should always remember to factor in taxes and insurance when determining your projected monthly mortgage payment on a new home.
What Is an Escrow Account?
Generally, two types of escrow accounts come into play in real estate: accounts for homeowner fees and accounts when selling your home.
Paying homeowner fees is another essential part of the real estate process that takes place after the sale of a home.
Escrow accounts hold the borrower’s funds, which are set aside for homeowner’s insurance and taxes. Borrowers pay into the account each month, and then the escrow company handles the process when homeowners insurance and taxes come due each year.
Buying and Selling a Home
The second common application of escrow in real estate is when buying or selling a home. The purpose, in this case, is to protect the earnest money deposit made by the buyer, which shows that they’re serious about purchasing the home.
If the buyer doesn’t follow through with the purchase, the seller most likely keeps the earnest money deposit. However, those that follow through with the purchase typically use their earnest money deposit to cover some or all of their closing costs.
On the flip side, escrow accounts also protect the buyer by ensuring the seller doesn’t receive the earnest money until after the transaction is complete. Additionally, the buyer has the right to back out and receive their earnest money back if the home doesn’t pass the home inspection or the appraisal comes back less than what is expected.
Who Manages Escrow in Real Estate?
Escrow accounts must be managed by a trusted third party who is not directly involved in the real estate transaction. This means that the buyer or seller in the transaction cannot be appointed as the account manager.
Lenders or mortgage servicers are the most common parties that manage escrow accounts. Companies that service your home loan collect monthly homeowner’s insurance and real estate taxes and store them in a secure account until the end of the year.
It’s important to know that you’ll use escrow with your mortgage servicer until your loan is paid off. At that time, you may need to set up an account yourself or pay those bills directly since your lender no longer services your mortgage.
Escrow and Title Companies
Some accounts are managed by escrow companies instead of lenders and mortgage servicers. In this case, escrow companies analyze your account yearly to ensure there isn’t a major shortage or surplus. Title companies also get involved when dealing with earnest money deposits and transferring the title once the sale is complete.
What Is Your Role With Escrow in Real Estate?
As you know by now, the buyer and seller both play crucial roles when dealing with escrow accounts in the real estate process. Below are some of the most common things that buyers and sellers can do to make the process smooth:
- Buyers and sellers should hold onto all documents for tax purposes.
- Both parties should ensure that they read over all documentation and consult with professionals if needed. Your title agent, realtor, or lender should be happy to review the documents with you.
- Consult with your realtor when signing closing documents to ensure no changes are needed and all last-minute questions are answered.
- Buyers and sellers should be available to answer questions throughout the process.
Choosing an Escrow and Title Provider
Choosing the right escrow and title provider can make or break a real estate transaction. Inexperienced title agents may misplace necessary paperwork or show up late for meetings. That’s why working with Leading Edge Title of Central Florida ensures you get the best title services and work with industry veterans who are ready to serve all your real estate and title needs.