What is Escrow

Recently, I had a little disagreement with an Escrow rep. In this particular case, my buyers lender required that a bill be paid out of escrow. If my buyer had made a payment directly, it could take some time to reflect on the credit report, where being included on the settlement statement and handled by escrow, would resolve the loan approval requirements. This happens frequently, the most recognized of debts paid out of escrow being a mortgage on a house you’re selling or some cases, seller repairs completed and paid at close.  Some other examples would be, Student loans, Medical debt, IRS debt, credit cards etc. This allows a person to qualify on a home based on an adjusted debt to income ratio.

So, what was my disagreement with this Escrow Agent? In this case, my buyer had a debt to pay, prepared to march in to her creditor and pay it off immediate, the lender told her to hold off. He did not want to take the chance that the reflection of the payment wouldn’t show up on the credit re-pull before the scheduled close on her new home. (yes, they do re-pull your credit report) The lender instructed the debt to be paid out of Escrow. And so, off to the closing table we went, showing the debt to be paid, according to the settlement statement, all was good.
My buyer contacted me a few days later and said, “why did Escrow send the check to me?” While this was clearly a mistake, I contacted the rep and asked if the buyer should bring the check back in for them to resend.  After several correspondences with the brick wall, I mean, escrow rep… she stated to me, “You know, we were only doing that as a courtesy. It’s not my job to send checks on their behalf.” Well… Lets just say that we agreed to disagree, as to what her job is.

In a huff, I thought, everyone knows that dispersing funds is EXACTLY your job! I went to social media to prove that everyone knew…  Ok, so apparently ‘everyone’ doesn’t just know what escrow is about.  The biggest confusion was the mix up between a transaction being in escrow, the escrow rep, and an escrow account.

Lets see if I can clear this up without making things even more complicated…

When you’re buying or selling a home, the period of time that you’re under contract is typically known as being in “escrow”.  During this time, the Escrow Representative holds on to the buyers earnest money, reviews the contract and holds everyone accountable to the timelines spelled out according to the contract, which is used as escrow instructions. The Escrow Representative is a neutral 3rd party that protects everyone involved. They hold funds, they honor timelines, they arrange for signings and notaries, they handle the closing paperwork and ensure that the documents are properly completed, signed, recorded… and they also DISPERSE THE FUNDS, according to the settlement statement… Lastly, they are also the party who decides who gets the earnest money as collateral if the contract cancels. (that’s a whole other blog post) This is why it is crucial to ensure you have a competent Escrow Agent, who not only knows WHAT their job is, but also how to do it well.

Do you know that there is a difference between Title and Escrow? That’s right… they’re not the same. It’s commonly believed that Title and Escrow are the same, as you go to a title company to drop off your earnest and sign documents.  Title is a completely different entity than Escrow. They do different jobs, but as a convenience, every title company has escrow officers who handle the contracts.

While Escrow is negotiable, the seller may not force the buyer to use a company of the sellers choosing to obtain title insurance. By doing so, the seller will be responsible to pay for all of the buyers title costs. Per RESPA.

When you buy a home, you’ll notice that the lender will hold funds in an Impound account, also known as an Escrow Account. This account holds 1 year of Homeowners Insurance, to ensure that it is always paid, since the lending facility has ‘interest’ in the home. It also includes your property taxes… because there is no way a lender will take a chance of the home foreclosing due to non payment of taxes. Government trumps Banks in order of lien priority and no lender wants to lose out that big.
So, how is your escrow account funded? Well, upon closing, your escrow account is funded based on the final monthly cost for homeowners insurance (typically 1 year, plus 3 months) and property taxes. Property taxes in Arizona are paid in arears. The escrow account will be opened with a few months worth of taxes, and the buyer will be credited from the seller for their remaining balance not paid/due yet. This is divided up and added to your monthly payment to build the escrow account for that payment when it is due. Going forward you pay into the account, based on the monthly division of property taxes and home owners insurance billed. If you change insurance to get a better rate, or if rates go up, your escrow will reflect the change. If property taxes go up, your monthly contribution to the escrow account will be adjusted accordingly. Both of these outside expenses will cause your monthly mortgage payment to fluctuate in order to ensure that insurance and taxes are paid in full when due.

What happens if your escrow account has more than owed? For example, if you move out of your home and rent it out, cutting your insurance in half, due to it being a different type of policy, your mortgage company does not hold on to that overage. The mortgage company is required by law to reimburse you on any overages in the escrow account.

Can you avoid having an escrow account. No. You may be able to pay a small monthly fee in order to handle your own insurance payment each month, as long as you have enough equity in the home. But why would you want to?  As far as taxes are concerned… Those are going to get paid by the bank… It’s not that they don’t trust you, but they just don’t trust you to pay it yourself every 6 months.  And, while we’re on it… It’s not that we don’t trust them, but I know we like to check online to make sure that our property taxes are paid. It may not be a bad thing for you to do either.

Hopefully that helps someone…. Clear as mud, right? It’s a complicated business, we don’t expect everyone to understand it all… but it’s super helpful when the Escrow Rep at least understands HER job.  Also when you hire someone to help you buy or sell a home… maybe make sure they understand this as well, it will help protect you, should something go wrong.

Contact me for me for more information!

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