Understanding Escrow in Real Estate

When your mortgage closes, your lender will usually requires you to open an escrow account to cover property taxes and homeowner’s insurance. You’ll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you’ve neglected to pay the insurance, the lender would be left with no collateral.

Benefits of an Escrow Account

Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Your escrow account will have a built-in cushion, if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months. expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before you close on your home.

How to Buy a Forclosure

It is a fact that banks want to dispose of the property that they acquire, but that doesn’t necessarily mean they’ll give it to you without trying to make a profit. If you want to make sure that you get the best deal there is when you buy a foreclosed home it’s best to have some knowledge on the process. Here are some steps to help you make sure that you follow the right procedure the next time you buy a foreclosed home.

Buying a Foreclosure

1. Do your research. The backbone of closing a good deal when it comes to foreclosed homes is being able to know everything there is about it. It’s standard procedure to publicize and file notices, so everything is open. All need to do is check with your local county sheriff and read the papers. You can also gather other information from the bank that owns the property.
2. Get an appraisal and home inspection. A lot of sellers would say you should do this after the deal to avoid adding to the expenses; but it can be essential if you want to make sure that you make the right offer. A home inspection will give an idea of how much you need to get the home into better condition and the appraisal will help you find out what it is really worth.
3. Do the math. You need to make sure that you get the numbers right. With the information from the bank you’ll be able to know what the bank’s break even calculation is. From this you’ll want to remove the cost for repairs, cost of the foreclosure process, liens and other expenses. This will give a rough amount of what your bid should be. Compare it to the appraisal and make sure your amount isn’t higher than the actual value.
4. Make a proposal. Now that you’ve got all the information you need you can make an offer. It is common to write a letter to the bank stating your interest in the property and letting them know what you are willing to pay. You can include some of the computations you’ve made to help support your offer. You can hand this in directly or send it to the concerned department.
5. Go for a quick close. Banks will usually want the process to be over quickly rather than wait a long period. Make sure that you have all the necessary documents ready. You will also want to have access to an escrow account since this is a preferred method of payment for most bank owned homes.

Getting the Ball Rolling on Buying Your First Home

So if you are looking for a place to start, wouldn’t it make good sense to make your first step be hiring your Real Estate Agent and Loan Officer and put your team in place?

Getting an Agent

A Real Estate Buyer’s Agent can make things easier and you don’t have to pay them a dime. They are paid by the seller of the house you buy, based on an amount negotiated between the seller and his listing agent. Your Buyer’s Agent is not just there to turn the key and let you in the house, but to research the market, assist in negotiation, process paperwork coordinate the transaction, deal with home inspections and other pre purchase tasks, and guide you through closing. There is a lot of responsibility and ethic involved on behalf of the Buyer’s Agent so you don’t want to take lightly the matter of choosing one. Referrals from friends and family are good.

If you are familiar with a particular company, call them. Or call the name on the sign of a house you saw that you liked. Upon meeting, if you like him, keep him! If not, call someone else next time until you find the person with whom you have good communication and a genuine interest in your project.

Get Your Mortgage In Place

Now you need a Loan Officer to give you a budget (with and without escrow) , a mortgage approval, and payment scenarios based on your credit and income information. Again, references and association with a reputable company are important factors. Your best referral, though, will come from your Buyer’s Agent who has worked with many lenders and knows which ones deliver what they promise and gets the job done as efficiently and drama free as possible.

Home Buying Should start with finding a Real Estate Agent and Loan Officer, and end with you receiving the keys to your new house. Expect some stress and drama along the way but know that with a good team and that approval in your pocket you will soon be enjoying life in your new home.