Be Informed: What is Escrow?

The first time you heard the term, “escrow” you may have been thrown for a loop. While the word may have had you confused the first time, here are some essential things to know about escrow—what it is, what it’s used for, and how it works.

What Is Escrow?

Escrow is a legal notion where money or assets are held by a third-party on behalf of two other parties in the middle of completing a transaction.

An escrow company provides two parties the service to make sure everyone does what they say they’re going to do. The escrow company acts as a middleman to protect the assets while the home purchasing process is happening.

Applied to real estate transactions—when buying or selling a home, escrow is the trusted third-party, who is someone other than the buyer or seller, who will hold money to make sure you execute the transaction correctly.

The key thing to remember here is that the third-party is a trusted party. This is a neutral entity who doesn’t care whether a home buyer or home seller comes out ahead of the other. The primary role of an escrow service is to make sure each party in a real estate transaction holds up their end of the deal.

Search for a reputable escrow company, or ask your real estate agent for a recommendation to find a trustworthy service.

How Escrow Works When Purchasing A Home

When buying a new home, you agree to pay the purchase amount within a certain time, and the seller will provide the home they’re selling. Your home purchase is probably contingent on a few things; namely financing and a home inspection. While you’re securing financing and scheduling a professional home inspection, you will make an escrow payment, or an “earnest deposit,” writing a check to an escrow provider in an agreed-upon amount that shows your intent or seriousness of purchasing that home. This gives the seller some reassurance that you’re serious.

Escrow opens when a buyer and seller sign an agreement for a real estate transaction, then deliver the agreement to an escrow officer who helps make sure everyone meets the contract conditions.

Escrow closes when everyone did everything they agreed to do, and the homeownership is transferred to the buyer.

Once the escrow provider verifies everyone held up their end of the agreement, they’ll either give you a refund, apply it to the purchase price or the home, or pass the money along to the seller (if the buyer doesn’t satisfy requirements).

Escrow Accounts For Homeowners Insurance And Property Taxes

The other time you’ll hear about escrow may be for an escrow account—which is slightly different than for a real estate transaction. When making your monthly mortgage payments on your home loan, you may also be paying for additional home expenses like property taxes and homeowner’s insurance as part of one lump sum.

Property taxes are usually an annual expense, and sometimes homeowner’s insurance is as well, though many insurance companies accept monthly payments. To alleviate the lender’s risk of you not budgeting properly for these payments, they make sure tax and insurance get paid by adding them to your monthly mortgage payment.

This portion of your monthly payment is deposited into a separate, escrow account. These funds are kept in escrow (by a company outside of both you and your lender) until their respective payments are due once a year, then they’ll make the payment on your behalf. You’ll discuss this with your lender when you finalize the purchase of your home, so it shouldn’t be a surprise.

If there’s a difference in how much you owe and how much you’ve contributed to the escrow account, your lender will let you know. You’ll either receive a refund if you overpaid, or if you didn’t contribute enough, your lender will pay the difference, then send you a bill for the additional amount. You may be able to pay the bill over the coming year.

If you need help finding an escrow company or have any questions about the escrow process for real estate, get in touch

This is a Relationship Business – My Clients Come First!

Relationships are what makes the world go around and makes life worth living.  In business, I understand my relationships with my clients are based on trust, in my words but also, in my actions. In business as in life, having integrity, being honest and acting in your best interest and mine, is what I believe leads to true success and peace of mind in the short and long run.  I am blessed because I truly care about my clients. Their happiness is my happiness. 

NextHome City Realty believes that by investing in the strongest possible relationships with our brokers, they have an expert-level understanding of the market, as well as the NextHome philosophy which is simple: clients come first. We pledge to be in constant communication with our clients, keeping them fully informed throughout the entire buying or selling process. We believe that if you’re not left with an amazing experience, we haven’t done our job. We don’t measure success through achievements or awards, but through the satisfaction of our clients. WE ARE HERE FOR YOU!The most knowledegable, confident brokers are also the most successful and that is why Paul Mychalowych, Broker-Owner is present whenever needed, as a resource and bringing over 20 years of experience in residential and commercial real estate sales.

All of us at NextHome City realty have a shared vision. We are unwavering in our commitment to the absolute best offerings in local and global marketing, property representation, and offer negotiation.

THE HOME BUYER’S GUIDE TO GETTING MORTGAGE READY

Don’t wait until you’re ready to move to start preparing financially to buy a home.

If you’re like the vast majority of home buyers, you will choose to finance your purchase with a mortgage loan. By preparing in advance, you can avoid the common delays and roadblocks many buyers face when applying for a mortgage. Follow these three steps to begin laying the foundation for your future home purchase today!

STEP 1: CHECK YOUR CREDIT SCORE

It’s a good idea to review your credit report and score yourself before you’re ready to apply for a mortgage. If you have a low score, you will need time to raise it. And sometimes fraudulent activity or erroneous information will appear on your report, which can take months to correct.

The credit score most lenders use is your FICO score. Base FICO scores range from 300 to 850. A higher FICO score will help you qualify for a lower mortgage interest rate, which will save you money.1

Your FICO score is a weighted score developed by the Fair Isaac Corporation that takes into account your payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).1

By federal law, you are entitled to one free copy of your credit report every 12 months. Request your free credit report at www.annualcreditreport.com.

Minimum Score Requirements To qualify for the lowest interest rates available, you usually need a FICO score of 760 or higher. Most lenders require a score of at least 620 to qualify for a conventional mortgage.2

If your FICO score is less than 620, you may be able to qualify for a non-conventional mortgage. However, you should expect to pay higher interest rates and fees. For example, you may be able to secure an FHA loan (one issued by a private lender but insured by the Federal Housing Administration) with a credit score as low as 500.

STEP 2: SAVE UP FOR A DOWN PAYMENT AND CLOSING COSTS

When you purchase a home, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage).

Generally speaking, the higher your down payment, the more money you will save on interest and fees. For example, on a conventional loan, you will be required to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent. PMI is insurance that compensates your lender if you default on your loan.3

For a conventional mortgage with PMI, most lenders will accept a minimum down payment of five percent of the purchase price. FHA loans only require a 3.5 percent down payment if your credit score is 580 or higher.3

There are a variety of other government-sponsored programs created to assist home buyers. Consult a mortgage lender about what options are available to you.

Closing costs—which can range between two to five percent of a home’s purchase price—should also be factored into your savings plan. These may include loan origination fees, appraisal fees and other fees associated with the purchase of your home.4

If you don’t have the funds to pay these outright at closing, you can often add them to your mortgage balance and pay them over time. However, you’ll be charged interest on the fees.

Current Homeowners If you’re a current homeowner, you may have equity in your home that you can use toward your down payment and closing costs on a new home. We can help you estimate your expected return after you sell your current home and pay back your existing mortgage. Contact us for a free evaluation!

STEP 3: ESTIMATE YOUR HOME PURCHASING POWER

It’s important to have a sense of how much you can reasonably afford—and how much you’ll be able to borrow— to see if homeownership is within reach.

To get started, visit the National Association of Realtors’ free Home Affordability Calculator at www.realtor.com/ mortgage/tools/affordability-calculator.

This handy tool will help you determine your home purchasing power. It also offers a monthly mortgage breakdown that projects what you would pay each month in principal and interest, property taxes, and home insurance.

Once you have a sense of your purchasing power, it’s time to find out which neighborhoods and types of homes you can afford. The best way to determine this is to contact a licensed real estate agent. We help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your specific needs.

If there are homes within your price range and target neighborhoods that meet your criteria—congratulations! It’s time to begin your home search.

If not, you may need to continue saving up for a larger down payment … or adjust your search parameters to find homes that do fit within your budget. We can help you determine the right course for you.

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.

START LAYING YOUR FOUNDATION TODAY
It’s never too early to start preparing financially for a home purchase. These three steps will set you on the path toward homeownership … and a secure financial future!

And if you are ready to buy now but don’t have a perfect credit score or a big down payment, don’t get discouraged.

There are resources and options available that might make it possible for you to buy a home sooner than you think. We can help.

Want to find out if you’re ready to buy a house? Give us a call! We’ll help you review your options, connect you with one of our trusted mortgage lenders, and help you determine the ideal time to begin your new home search.

Sources: 1. myFICO 3. Bankrate 2. Bankrate 4. Investopedia