Are you a first-time homebuyer? Are you looking buy a home in the near future? Understanding escrow is an important part of the process.
What is escrow? That’s a fair question. That word comes up a lot in the home-buying process. Escrow is a legal process where a third party holds on to money or assets during a transaction. Once both parties have completed their portions of the transaction the money or assets can be released by escrow. Essentially the assets are held in escrow while the transaction is being completed.
Escrow is most often heard when buying a home but it can be used in other transactions as well. This third party is in place in case one of the other parties does not hold up their end of the deal.
In addition to the escrow process you can also have an escrow account. An escrow account is typically set up when purchasing a home. This is a secured account that is set up for you. Part of your mortgage payment will be deposited into this account on a monthly basis to pay for insurance and property taxes. This is an automated process so as a new homeowner you do not have to make separate payments to the escrow account. The money needed to fund this account will be taken from your monthly mortgage payments and paid to the insurance and property taxes on your behalf.
In this post I am going to focus on preparing for escrow. In a previous post I detailed ways that you can save money throughout the home-buying process. If you’d like to learn about how to save money while in escrow check out that post HERE.
Now that we’ve determined “what is escrow” let’s get into how to prepare for escrow
1. Be available
When you are in escrow you need to be available. Now that your offer has been accepted and escrow has been opened you will be contacted by several different people. First you’ll be in contact with your realtor and/or realtor’s assistant. They will keep you updated with the process and how everything is going. Secondly you will be in contact with your escrow agent regarding forms that need to be reviewed and signed. You will also need to speak find an insurance company to select a homeowners insurance policy. Then there’s your mortgage broker and lender. The emails, calls and texts are pretty constant throughout the escrow process. Be sure to check your phone and emails frequently if you’re in escrow.
2. Keep contact information ready
What I mean by this is keep contact information for everyone related to the escrow process available for when you need it. This includes the names, phone numbers & company information for you realtor, mortgage broker, escrow officer, escrow company, insurance company, etc. You’re gonna need this information when filling out forms. You’ll also want to know who to reach out to when you have specific questions.
3. Keep track of important dates
When you’re in escrow there are certain dates that you have to remember. For example you’ll need to have your inspection, appraisal & loan approval all completed by specific dates. Keeping track of these dates is very important. Of course your realtor will be keeping track of these dates as well. You are responsible for choosing your inspector and scheduling the appointment. I highly recommend being there for the inspection if you can because you can learn a lot about the house and get a walk-through from the inspector. It’s also important to keep track of deadlines for signatures and paperwork. A lot of paperwork is time-sensitive so be sure that you are completing paperwork on-time and not delaying the escrow process.
4. Have documents ready
When you are getting ready to buy a home there are certain documents needed for the loan approval process. You can start getting this paperwork together even before you open escrow to make for a smoother process. Things like ID’s, social security cards, recent pay stubs, recent bank statements, verification of assets, etc. You’ll also need tax returns for the last 2 years. It’s a good idea to start getting these records ready ahead of time and you’ll be glad you did.
5. Have earnest money ready
When your offer is accepted on a home you will need to wire earnest money into the escrow account within 3 days. Earnest money is used toward the down payment. The amount depends on the price of your home and how much the seller requests. Earnest money needs to be liquid meaning it needs to be readily available for use. It should be held in a savings account that you have easy access to. Because down payments are so expensive a lot of people rely on their 401k to pay for their down payment. While I don’t recommend using a 401k for a down payment on a house I do understand that it may be the only option for some people.
One important thing to know about using your 401k is that the money in that account is not liquid. Although you can use it for a down payment you will not be able to use funds from a 401k for earnest money. You cannot receive the funds from your 401k and wire them within the three days. I think this is important to note if you are looking to use funds from your 401k to purchase a home. You can use your 401k for a down payment but you will also need enough money in a savings account to cover your earnest money.
6. Talk with a mortgage before you start the process
Mortgage brokers ultimately want your business and often times they are willing to meet with potential clients to answer questions. I highly recommend taking advantage of their knowledge if you are thinking about buying a home in the near future. It’s especially important to discuss anything that may affect your escrow process. If you have had a recent leave of absence, name change, maternity leave, change in career, etc. Those are things that can potentially affect your home buying timeline and ultimately your loan approval. Talking about these things beforehand can keep you from having a rough escrow process or even getting denied for a home loan.
There you have it. I’ve defined “what is escrow” and told you how you can prepare for escrow.
I hope this post was helpful. As a recent first-time homebuyer I know that this information would have been helpful to me when I was looking to buy. If you’d like to see more posts from my Homebuyer series they will be listed below.