If you remember nothing else about the word escrow, remember the concept of a neutral third party. They have nothing to gain nor lose from your real estate transaction. It is used in both purchase and refinance transactions across the country. Escrow is completely neutral between the buyer, seller, and lender. They always handle the earnest money deposit, and set up impound accounts, also known as an escrow accounts.
The Earnest Money Deposit
When escrow is opened on a purchase transaction, you, the buyer, would send your earnest money deposit (EMD) to escrow. The earnest money deposit shows the sellers that you are serious about purchasing their home. The EMD will be applied to the down payment at the close of escrow.
What is an Escrow Account?
Many lenders will require an impound account to pay for your property taxes and homeowners insurance. This is so that the lender can have assurance that the bills are paid and the property is not at risk. If an impound account is not required, consider requesting for one. Impound accounts make it easier to pay for large expenses like property taxes. Instead of coughing up a rather large lump sum for a property tax bill or an insurance premium, the balances would be divided by twelve and added to your monthly mortgage payment. If your loan doesn’t include an impound account, you must plan to pay for these large property related expenses yourself.
If you fail to pay your property taxes or hazard insurance, your lender could in some circumstances either,
- Add the amount owed to your loan balance
- Add an impound account to your loan
- Purchase a ‘forced-place insurance policy’ on the home. This insurance policy is more expensive than regular homeowners insurance. Also, the forced placed policy does not protect you in any way. Forced-placed policies only protect the lender in the event your home is damaged.
IF YOU DO NOT PAY YOUR PROPERTY TAXES, YOUR STATE OR LOCAL GOVERNMENT COULD IMPOSE FINES AND PENALTIES ON YOU. A TAX LIEN COULD ALSO BE PLACED ON YOUR PROPERTY AND YOU COULD ALSO FACE FORECLOSURE.