A Homebuyer's Guide to Escrow

Once a seller accepts your offer, you enter the home stretch of your journey toward home ownership. At this point, though, there's still some work to be done before you can collect the keys. During a period known as escrow, an independent agent handles most of the details. This process ensures both you and the seller perform the way you agreed you would. Of course, that's not the end of escrow for many buyers. When you take out a mortgage loan, your bank may insist that you deposit your property tax and insurance payments into a special escrow account established for that purpose.

Escrow for Home Buyers

Escrow is a legal term that describes a trust arrangement between two parties. It is the act of depositing something of value, usually cash or documents, with a neutral third party who only delivers the deposited items when certain conditions are met. If you're in escrow for a home purchase, an escrow agent (usually the title company conducting the closing) will gather and hold the seller's deed, your down payment and the mortgage money your receive from the bank. They will then perform various tasks required by the sale and purchase agreement, such as obtaining approval to the home inspection report and taking out a title insurance policy. When the contract contingencies are met, the escrow agent will pay the closing money to the seller and record the deed and loan documents in the appropriate county office, thus transferring the property to the buyer. At this point, escrow is said to be closed.

Escrow for Mortgages

Mortgage lenders require that you not only make your mortgage repayment but also that you insure your home and pay your property taxes on time. These payments commonly go by the acronym "PITI":

• Mortgage Principal
• Mortgage Interest
• Property Taxes
• Homeowners Insurance

To safeguard their investment, many lenders collect your PITI payments prorated by month, together with a two-month cushion to guard against tax increases. The money is deposited in escrow and used to pay your bills when they arise. Under the Real Estate Settlement Procedures Act, lenders must send you an annual statement showing the amount held in your escrow account and projected payments for the coming year. If your account shows deficiencies, your lender may raise your monthly payment. Excesses of $50 or more must be returned to you within 30 days of the annual statement.

Why Use Escrow?

Escrow takes the stress out of home ownership. During the home purchase process, escrow ensures that the property and its title are "clean" before the seller cashes any checks. After closing, mortgage escrow ensures that your bills are paid on time and your property is properly insured against hazards -- providing invaluable peace of mind for home buyers.