What You Need to Know About Escrow Accounts

Escrow refers to the time period between when a home buyer's offer is accepted and when they officially take control of the home. The standard time period is about 30 days, but the numbers vary considerably. There's a lot for both buyers and sellers to do during this, and a lot of ways that something can go wrong. Luckily, home buyers who take the time to learn more about it should have a much smoother escrow experience than those who go into it blind.

The Basics of Escrow

Because few sellers know the buyers very well, escrow is the art of letting a neutral entity handle the most valuable parts of the transaction. To ensure a seller doesn't run off with the buyer's down payment, both parties let someone else hold onto key documents or cash until certain information can be verified. No matter how trustworthy a seller may seem, this is the time where secrets emerge that may threaten the ownership claim of the buyer. So if the seller is attempting to sell the house as their own when really it's co-owned by an ex-spouse, a buyer can learn about this before moving in. Escrow is not required for buyers, though it is highly recommended for all buyers regardless of their neighborhood or price range.

Working with an Agent

Buyers are likely already working with a real estate agent, but now they'll need to work with an escrow agent as well. These agents are there to safeguard the seller's deed as well as both the buyer's mortgage and down payment. These agents are usually assigned by the title company that officially closed on the house. They're in charge of taking out a title insurance policy and getting the home inspection documents officially approved. Only when all of the buyer and seller contingencies are met will they officially transfer the deed and the mortgage to the appropriate parties. Buyers are encouraged to get to know the agent, so they're comfortable making requests or clarifying terms or information they may not understand.

Financial Escrow

Every buyer's lender will have their own contingencies when it comes to granting a loan. They expect buyers to pay their insurance, interest, and property taxes (on top of the standard mortgage payments.) Instead of taking the buyer's word for it, some lenders will collect these fees from the buyer at the same time they grant the loan. The lender will then hold that money in an account. This is commonly known as mortgage escrow, and lenders will use these funds to pay for bills as they come up. They may also require the buyer to pay for two months worth of bills into the future, so there's less chance of default on any obligation. Buyers should be reading the fine print before accepting the loan terms.

Requests and Demands

Escrow is a time for buyers and sellers to hammer out the last details on the home. So if both the seller and the buyer have the home inspected and the buyer's inspector discovers something the seller's inspector missed, then the buyer may have the leverage to renegotiate the price. If it turns out the seller has a neighbor who is contesting the boundaries of the property, then the seller has the chance to settle the dispute before the buyer takes possession of the home. It helps if a buyer takes a realistic view of the situation during escrow. Too many are quick to call the sale off, which will only mean having to restart the home buying process all over again.

Help from All Sides

Few buyers truly understand the home buying process, which makes sense because they're in the middle of a huge life transition. This is where real estate agents or financial planners can really step in and make a difference. They're trained to see the numbers from a far less emotional perspective, which makes it easier to avoid major mistakes. An inspection may not always go well and a seller may not always have a blemish-free financial history. An experienced professional in the industry can give a buyer the detailed advice they need to decide whether or not the information is enough to crawl out from under the sale.

From inspectors being on vacation to the loan falling through on the buyer's end, the escrow process is rife with potential complications. Venice buyers who skip it are taking both a financial and a personal risk all at once. If someone else contests the ownership of the property, a buyer may not have very much recourse if they didn't successfully complete the escrow process. Knowing more about it can help the buyer map out a timeline and organize their thoughts as new information is brought to the table.