Escrow: What is it and How Does it Affect You?

Common Problems You Need To Fix In Your Home Before You Try To SellThe home-buying process is one fraught with complications that are hard to understand and harder to prepare for. One of the more mysterious elements in the process is the concept of escrow and its multiple meanings. The purpose this article is to enlighten readers and provide them with sufficient information so they can be confident that they will not be thrown by a lack of understanding of the escrow process.

Closing Escrow

The escrow process, or “settlement,” is the final chapter in any home-buying process. To get there, all necessary parties must play their part in sealing the deal.

The Escrow Account

One way of showing a seller that you are serious about buying their home is to make an earnest money deposit on it. Of course, you would not make the payment directly to the seller. Instead, it would go into an escrow account and remain there until a long list of conditions are met. An escrow account is basically a container into which valuable things are deposited and held by an independent third-party (escrow officer) until the day of closing.

The VA Helps Service Members

The U.S. Department of Veterans Affairs or “VA” is a federal government-run military veteran benefit system. The VA is responsible for administering programs that benefit veterans, their families, and survivors. One of these benefits is the VA loan program which guarantees loans issued by private lenders. Consistent with information obtained from the home loan professionals at Low VA Rates, U.S. military veterans and eligible family members can obtain 100 percent financing (no down payment) on the purchase of a new home with competitive interest rates and no requirement for mortgage insurance.

Escrow as Prepaid Expenses

According to the U.S. Department of Housing and Urban Development (“HUD”), the term “escrow account” also refers to a reserve account funded by monies added to your mortgage payment and used to insure that your hazard insurance and property taxes are always up-to-date. In some states, this second escrow account is known as an impound account and functions the same way. Lenders know that tax liens and lapses in fire insurance represent a risk to their security interest. To offset this risk, they require borrowers to prepay certain expenses every month through the collection of normal mortgage payments.

How Escrow Helps Home Buyers

The concept of escrow makes it easier for folks to buy a home by neutralizing certain risks borne by important parties in a real estate deal. Without the assurances it provides, important parties would not so readily participate. With these, sellers have confidence that on closing day the funds will be there to close. Buyers can have confidence that their down payment monies are safeguarded until they get their hands on the keys to the house. Finally, escrow and impound accounts provide lenders with the assurances that critical tax and hazard insurance payments never slip into arrears.

Closing on a new home does not have to be stressful. Once you have settled on your dream house and have been approved for a mortgage, the final step (closing escrow) represents the endgame of the process. With a bit of help from some trained professionals and your own research, you can look forward to a smooth and uncomplicated closing.

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