What is Escrow?

An escrow or escrow account is commonly opened when a person is in the process of selling or buying a home. A neutral third-party holds the account on behalf of both parties. The escrow agent has the authorization and responsibility to carry out all instructions agreed upon by both parties. The funds, assets or securities are held until the agent receives the appropriate verbal or written consent to end the escrow after both parties have fulfilled their obligations. An escrow officer is expected to use common sense and good judgment if documents are received for recording without clear instructions. Escrow officers often work for title underwrites or agencies. They play no role in the insurance or closing aspect of the process.

During the sale of house a seller and buyer might agree to open an escrow account while a property inspection is pending. The buyer deposits the payment amount owed for the property, after the inspection is completed the money is transferred to the seller and the buyer receives the title. It is vital both parties fully understand and agree to the terms of the escrow account, an escrow account is often difficult to cancel after it has been opened.

A lender usually requires an escrow account be opened when your mortgage is closing. This is to cover future property taxes and homeowner’s insurance. An initial deposit is made and then followed by monthly payments. This amount is typically added to your mortgage payment. The escrow agent then releases the funds when the taxes and insurance are due. This protects the lender from future liens on the property if the property taxes go into default. The lien would make the property harder to sell. If the homeowner’s insurances lapses and the property is destroyed, the lender is left with no collateral. A borrow can use an escrow account to spread their tax and insurance expenses over a twelve month period compared to three large payments. Escrow accounts are required to make your payments on time if you miss a payments. Your tax and insurance will change slightly every year. The lender will review and adjust your escrow payments annually. To ensure a successful, hassle free closing there are some things you should not do while in escrow or the last step in the home buying or selling process.

Don’t go on vacation, become hard to reach or unavailable while in escrow. Make sure your lender can reach you when they are ready to process your loan. Stay in contact with the necessary people while trying to close your home. Don’t lose cell phone service and don’t change your cell number. Any bumps or glitches in the process will push back the closing date. Compare it to parents who are expecting a baby, they have a plan set in place near or on the due date. It is a major event and should be made a priority in your life.

Don’t change jobs or decide to become self-employed during escrow. Lenders prefer a consistent and steady job history. The lender may question your ability to afford the home and generate consistent income. It could put the process on hold or cancel the process. The lender will most likely reevaluate your financial position. Also, don’t open or start a new business. This will further complicate the process by increasing your debt and changing your assets.

Don’t make major purchases and increase your credit card debt while in escrow. This will increase your debt and throw off your debt to income ratio. This measures how much of your income goes towards debt obligations. Lenders take your debt to income ratio into consideration when reviewing your loan application. Lenders also look at how much cash reserve you when going through the mortgage process. It would be in your best interest at this time not be a big spender. Be sure to keep your cash and credit purchases low, don’t lease a car, cosign on a loan, and buy furniture or appliances until after the closing is complete.

Make sure you pay your bills on time and maintain a good credit score. If your credit score drops before the loan goes through it will most likely prevent you from closing on the house. Also, don’t open new credit card accounts and don’t close old credit card accounts. This could have negative effects on your credit score. It is best to wait until you are of escrow, after you have closed on the house.

Don’t transfer large amounts of money into or out of your checking or savings accounts while in escrow. Be sure to check with your mortgage company before doing so. This activity will raise red flags. They will think you secured another loan, under reported your cash reserve or have created new debt.

The goal during the escrow or the closing process is to maintain your debt, income, spending and savings at or near the same levels reported when you filled out the loan application. Any significant changes could delay or stop the closing process.

The seller should also be careful not to cause any unnecessary delays during the escrow or closing process.
Don’t contact the buyer directly, any communication should go through your agent.
Don’t turn off any utilities before the buyer takes possession.
Don’t move out of the property while in escrow.
Keep mortgage payments current.
Make sure the property is available for all inspections and appraisals.
Don’t make any required repairs on your own, hire a licensed contractor.
Make sure all required repairs after inspection are completed in a timely manner.
Keep the interior and exterior of home is immaculate condition.
Make tentative plans to move out.
Leave all keys, codes and garage door openers on the kitchen counter.
Leave all instructions, receipts and warranties in a kitchen drawer.
Both the seller and buyer should remain patient while in escrow. Both parties should expect minor complications and changes in the estimated closing date. Both parties should consider the sale price of the property an estimate until the escrow or closing process is complete.

Photo by Kevork Djansezian/Getty Images