Author: Jay Hurst, Co-Founder of Hurst Lending
Navigating the landscape of home buying can be a challenging endeavor, especially for first-time buyers. One of the terms you’ll often come across is “escrow,” a concept that, while crucial to the home buying process, is often misunderstood. As a responsible mortgage lender, Hurst Lending aims to provide clarity on such topics, ensuring that you can make informed decisions as you explore different mortgage loans and housing options online.
What is Escrow (with respect to your real estate earnest money deposit)?
In its simplest form, escrow is a legal arrangement where a third party, often a title company or an escrow agent, holds assets or funds during the process of a transaction between two parties. In real estate transactions, these assets could be the earnest money deposit or the property deed. The third party is responsible for ensuring that all conditions of the transaction are met before releasing the assets or funds to the respective parties.
To illustrate, let’s consider an example. Suppose you’re buying a home for $300,000, and you’ve agreed to put down an earnest money deposit of 1% of the purchase price, which is $3,000. Once the agreement is signed, your $3,000 deposit will be held in an escrow account managed by a neutral third party (usually a title company or an attorney). It will remain there until closing, when it will be applied toward your down payment or closing costs.
The escrow process provides a safety net for both the buyer and the seller. For the buyer, escrow ensures that the seller will meet their responsibilities, such as making any agreed-upon repairs, before the transaction is finalized. For the seller, escrow guarantees that they will receive the funds from the sale once all conditions are met.
What is a Mortgage Escrow Account (with respect to payment of taxes and insurance on an on going basis after your closing)?
After closing, your mortgage lender may continue to use the escrow account to manage ongoing expenses related to the property, such as property taxes and homeowners insurance. You’ll contribute to this escrow account monthly as part of your mortgage payment, and your lender will make the necessary payments on your behalf when they’re due. If you put down less than 20% you will have to have an escrow account but if you put down 20% or more then you don’t need to have an escrow account.
If you set up a mortgage escrow account, part of your monthly mortgage payment will go into the escrow account to cover ongoing expenses like property taxes and homeowners insurance. For example, if your annual property taxes are $3,600, and your homeowner’s insurance is $1,200 per year, you would need to contribute $400 per month into the escrow account ($3,600 + $1,200 = $4,800, divided by 12 months).
How Hurst Lending Can Help
At Hurst Lending, we understand that navigating the world of mortgages and escrow can seem daunting. That’s why we’re committed to guiding you every step of the way. With our experienced team of mortgage experts, we can help you understand the ins and outs of your escrow account, from the initial setup during the home buying process to managing ongoing expenses after closing. Our goal is to provide you with peace of mind, knowing that your home buying process is being managed by professionals dedicated to your success.
Understanding the role of escrow in your mortgage can empower you to navigate the home buying process more confidently. It ensures the protection of your earnest money deposit during the transaction and helps manage ongoing expenses such as property taxes and homeowners insurance after closing.
About Jay Hurst
In addition to being one of the founders of Hurst Lending, I am also a financial planner. I have been helping our customers buy, sell, and refinance their homes since 2006. Our suite of industry-leading offers helps solve many common situations faced by homeowners and real estate investors. Have you ever experienced the frustration of trying to buy before you sell; Losing your dream home in a bidding war; Trying to obtain a No-Seasoning Cash-out loan; Being unable to get a mortgage because your new or old house needs modest repairs; or simply because you prefer using our funds to close quickly without having to liquidate other investments? Our Industry-leading suite of short-term loans solves these issues. We also offer a suite of real estate investor loan products and a full suite of conventional, VA, FHA, construction and traditional home loans.
Please feel free to contact me directly if I can help provide a loan for your next purchase or refinance, or even if you just want advice on how to get started or expand your real estate investing activities.
Co-Founder, Hurst Lending
*Disclaimer: This article is intended for informational purposes only and does not constitute legal, financial, or professional advice. Consult with a licensed professional before making any financial or real estate decisions.