When you buy a Tucson home, you learn a whole new vocabulary. Downpayment. FHA. VA. FICO score. Appraisal. Inspection. Contingencies. Spuds/SPDS. Outside of a real estate transaction, you might never come across most of these terms. Another important one to know about is "escrow". What is it and how does it work?
What is an Escrow Account?
In real estate terms, an escrow account opens up when the seller and the buyer enter into a purchase agreement. Important documents (such as the sales agreement, earnest money deposit, financial information, and property deeds) are held in safekeeping by an impartial third party until the final exchange of ownership takes place. Sometimes, this may be through an attorney. Other times, the account is held by the title company. It may also be the bank or another trusted individual that is in charge of the escrow account. Usually, it's left up to the buyer or the buyer's agent to decide who will hold escrow. Your Tucson real estate agent should have a list of trusted escrow companies they've worked with before for you to choose from.
How Does Escrow Work?
After you've chosen the company you wish to work with, your earnest money and all documentation relating to the Tucson home sale in question stays with the escrow company. During the sale process, the escrow company accumulates all relevant documentation (contingency checklists, inspections, repairs, etc.). Once all portions of the sales agreement have been officially met, money will be released from your lender into the escrow account. Then, the escrow company disburses the money to the appropriate parties. Finally, an escrow officer clears the title and the Tucson home officially becomes the buyer's. However, if there's a hold-up anywhere along the way, no money will be released.
Lender's Mortgage Account
After you've officially become the Tucson homeowner, your lender may open an escrow account for you. When you pay your mortgage each month, a portion will be deposited separately into an escrow account. This money pays for your property taxes and homeowners insurance. When these each come due, they will automatically be paid out of your escrow account. This can be extremely helpful to you because then you don't have to come up with a lump sum when either one of these is due. Also, you won't ever be late with your payments since they automatically get paid when due. It helps the lender because they know that their investment is protected. All FHA loans require that an escrow account be opened up for new homeowners. If you borrowed more than 80% of the purchase price, your mortgage company will most likely require you to have an escrow account.
That's how escrow accounts work for a real estate transaction as well as after you become a homeowner. If you have any questions, talk to your mortgage company or contact me. I'd be happy to help wherever I can.