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In different markets, being “in escrow” can mean different things. For some, it’s the period of time between going under contract and reaching the closing table. In others, it’s an ongoing part of the monthly mortgage payment.
You may have heard the term “escrow” used in a variety of ways in relation to real estate, but what exactly is escrow and how does it apply to a home sale, purchase, or ownership scenario? Our guide answers all of your escrow-related questions so that you can better understand how it works and how a streamlined closing process can benefit you, whether you are buying or selling a home.
In order to answer these questions, we’ll look at a few of the uses and definitions related to the concept of escrow.
The definition of escrow is, essentially, the process of putting a third party in charge of documents or finances in order to ensure that timely payments are made and that all parties to a real estate transaction are protected.
Escrow can be used for a variety of purposes during the home purchase and ownership process.
This type of escrow account holds the Earnest Money Deposit (EMD), documents related to the transaction, and any other items needed to complete the purchase and sale of a home or property. That means that if the sale falls through, a neutral third party is holding the money involved until the financial details are completed. This protects everyone involved and ensures that the terms of the contract are upheld.
● Escrow during a term of ownership involves the third party collection of funds from each month’s mortgage payment in order to pay for large items like property taxes and homeowner’s insurance. Such escrow payments may be required by the mortgage lender in order to ensure that these obligations are met and that the home is not in danger of loss, or loss in value, due to unpaid taxes or uninsured damage.
In the case of escrow on a house, the escrow payment will be 1/12 of the estimated annual cost of required payments like property taxes and homeowner’s insurance. That means that the payment can vary according to insurance rates, property assessments, and other factors.
Approximately every six months, the escrow company will be billed for taxes and insurance premiums on the property. These will be paid from the money held in escrow. Required escrow payments may then be adjusted if the estimates were insufficient to cover the costs or a refund may be given if the estimates were too high, resulting in too much money withheld.
An escrow balance is the difference in the amount of money held in escrow at any given time of year and the amount required to pay property taxes and insurance premiums.
● A negative balance or escrow shortage means that not enough funds were withheld each month, and the difference will be passed on to you.
● A positive balance means that too much money was withheld, and the difference will be refunded to you.
Escrow works in a variety of ways, depending on where you are in the home purchase or ownership process.
A house is generally in escrow from the time that it goes under contract until closing, when all of the obligations between buyer and seller have been fulfilled and the home’s deed is available for transfer. In most transactions, 30 days is sufficient for closing. However, in case of a cash sale, the process may be shorter, while a particularly complex sale may take significantly longer.
Escrow payments on a mortgage depend on the requirements of the lender. In some cases, like VA or FHA loans or other low-interest scenarios, escrow payments will be required for the life of the loan, which can be as much as 30 years. Some conventional mortgages, on the other hand, do not require escrow payments.
Escrow costs vary according to your local property tax costs and homeowner’s insurance premiums. One-twelfth of the cost of these payments will be added to your escrow account each month.
Remember, these costs can go up if your property tax assessment rises, if your market becomes more desirable, or if, on the other hand, your market becomes more risky. You will generally find out your adjusted escrow costs once each year.
Generally, escrow accounts are paid monthly as a form of forced savings for large, biannual tax and insurance payments.
No, you cannot withdraw money from your escrow account. The funds there are designated for payments to the local taxing authority and to your insurance company. In the event that you pay either of these bills directly, you may be eligible for reimbursement from the escrow account, depending on the circumstances and policies of the escrow company.
You will probably be required to pre-fund your escrow account at closing, depending on the time of year in relation to and the payment schedule of the local tax authority and your insurance company. This ensures that when a payment is due, there will be sufficient funds in the escrow account to cover it.
Your escrow payment may be reduced or eliminated in the following ways:
● Your property assessment and insurance premiums may go down, resulting in a lower biannual payment.
● You may refinance your home from a VA or FHA loan -- which requires escrow payments -- to a conventional which may not.
● You may request a waiver of your lender’s escrow requirement once you have paid your mortgage for twelve months with no late payments.
● You may pay off your mortgage, eliminating your escrow withholding.
California has specific requirements for the escrow process.
Just as in other markets, the time required for the escrow process is dependent on the complexity of the purchase. A cash purchase may require only days, while a complex process involving required repairs or sale contingencies can take many months to complete. The average is generally 30-60 days.
During the sale of a home, escrow requirements are driven by the buyer’s lender and his or her policies. In the event of a cash transaction, escrow may not be required, however it is recommended for the protection of each party to the transaction.
An escrow provider must be a corporate entity licensed by the California Corporations Commissioner to receive escrows for deposit or delivery. An escrow agent is employed by the escrow provider to facilitate the necessary services.
Escrow fees are generally regulated by the agencies regulating the parent company. For example, in the case of bank-based escrow services, the regulator is the California banking commission or the FDIC. In the case of broker-owned escrow companies, the regulator is the state’s real estate commission.
Escrow fees are generally about 0.2% of the property price plus an additional $200-250 dollars.
According to Salary.com, an escrow officer or escrow agent in California averaged $54,655 in 2019, with a range between $44,238 and $66, 270.
According to Salary.com, an escrow assistant in California averaged $49,878 in 2019, with a range between $43,168 and $58,513.
Find out more about how Endpoint’s innovative approach is revolutionizing the closing process, and check out the next article in this series to learn more about the closing process.
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