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What Is Escrow? Terms You Need To Know While Buying a House 

What if the only thing keeping you from buying a house was not having the right vocabulary? 

When you buy a home, you need more than great homeowners insurance. You also need to know what confusing terms like “escrow” mean. Just what does that term mean, and what are other real estate terms you need to learn ASAP? 

You have plenty of questions right now. Don’t worry, though: This guide will answer all of them and give you the information you need to successfully buy your first home! 

The Basic Definition: What Is Escrow? 

The most basic definition of escrow is the arrangement in which a neutral third party holds the money that has been deposited for a house and regulates payments so the other parties involved (including yourself) are happy. In addition to dealing with the actual finances, the third party deals with the related paperwork, including highly detailed settlement statements. 

In general, the contract holder helps ensure nothing goes wrong with the house-buying payments and paperwork. As a neutral party, they have every reason to be completely honest and above board throughout this process. 

Why Escrow Is a Home Buyer’s Ally 

How does the process of escrow benefit you as someone trying to buy a house? In short, the company handling the contract will ensure that your good faith deposit goes to the right people and is successfully used as your down payment. Most people never buy anything more expensive than a home, so it can provide real peace of mind when you have someone handling the money and confusing paperwork on your behalf. It’s one of the steps to buying your first home in Southern California

Navigating the Escrow Process Step by Step 

Before you can learn everything you need to know about escrow terminology, you need to understand how the process works. One of the reasons this process is confusing is that it involves several very different steps, and you will need to navigate each of them before you can complete the purchase. 

That process is unavoidable. The good news is this article will walk you through each step of the process so you always know exactly what to do and exactly when to do it. 

Setting the Stage: Opening an Escrow Account 

The first major part of this process is that you and the seller sign a purchase agreement you both find acceptable. After that, your real estate agent will take your good faith deposit and open an escrow account on your behalf. As detailed above, the account will be opened with a neutral third party who facilitates the process to satisfy the buyer and seller. 

The Path to Ownership: Key Escrow Milestones 

Once your real estate agent sets up the account, you will need to reach a few key milestones. The first is getting the lender’s appraisal of the property. The appraisal matters to the lender in case they ever need to sell the property. 

At this point, you should have already been pre-approved for the mortgage, and you will now need to secure financing and get a formal estimate of things like the loan amount, interest rate, closing costs, and other assorted mortgage costs. 

Safety Nets: Title Insurance and Home Inspections 

The next step is to get a title report that verifies the home doesn’t have any outstanding liens and that nobody else can legally lay claim to the property. Should anything be wrong with the title, the seller is obligated to get everything squared away before the house can be sold. 

For peace of mind, you may wish to purchase title insurance. This is a kind of coverage that protects both you and the bank if previously overlooked title issues pop up later. 

The Final Steps: Approving Disclosures and Closing Escrow 

Now, you need to review and approve any seller disclosures. Basically, these are potential problems that have been identified by the seller, including whether any parts of the home violate local housing codes. 

Next, you should get a home inspection (which may include a general inspection in addition to more specialized inspections, such as an environmental inspection). Afterward, you must purchase homeowners insurance. While shopping for coverage, check if your homeowners insurance covers emergencies and other situations. 

The final steps are to do one last walkthrough of the property and complete the closing disclosure form, ensuring it matches the previous good faith estimate. Assuming everything is in order, you can then sign all of the paperwork (warning: it’s a lot) with your escrow officer, completing the process. 

At this point, you should pat yourself on the back. You’re now a homeowner! 

The Players in Your Escrow Journey 

The main players in your journey are you, the seller, the lender, and the escrow officer. In some cases, those who handle your needs will also serve as your title company. By understanding who these players are and what they do, you can better understand your own role in this complicated process. 

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Who Manages an Escrow Account? 

Escrow accounts are typically handled by title companies. However, depending on your area and needs, they can be handled by different parties, including the lender, dedicated companies, and individual agents. 

The Roles of Escrow Companies and Agents 

As previously detailed, companies and their agents serve as neutral third parties during the mortgage process. They manage your good faith deposit, settlement statements, and other paperwork, all while facilitating the overall process to the satisfaction of the buyer and the seller. 

Potential Pitfalls and How to Avoid Them 

There are several things that can go wrong with the escrow and closing process. This can include unexpected problems with the title, financing pitfalls, and home inspection issues. 

Respectively, the best way to counter these problems is to get title insurance, work with an established lender (ideally your existing bank) and hire a reputable home inspector. Realistically, you can’t prevent the unexpected from happening, but you can mitigate potential issues by working with the best people you can find. 

The Misconceptions Around Escrow Accounts 

The main misconception about escrow is you can somehow lose your money. In reality, your good faith deposit is completely safe. Another popular misconception is that title insurance is required. It’s not, but it might give you peace of mind during a stressful time. 

Navigating Changes To Monthly Escrow Payments 

These payments can change due to factors such as property tax increases and changing home insurance premiums (make sure you memorize these top tax tips for homeowners). To navigate such changes, make sure you set aside extra money if possible and communicate any questions and concerns you have to your lender. 

Other Essential Home Buying Terms You Should Know 

Home buying terminology can be overwhelming at times. Below, you will find definitions for some of the most important terms. 

  • Closing costs: This is the term for all fees associated with closing the deal, including commissions paid to both agents involved. 
  • Contingency: This specifies anything that must happen before the house sale is complete. 
  • Deed of trust: In California, this deed replaces the traditional mortgage. 
  • Grant deed: This is the paper document of the real estate sale. 
  • Lien: This is a legal claim on the property from someone who is owed money by the current owner. 
  • Property taxes: The taxes you must regularly pay on your property. They are paid as part of your mortgage, and your lender will hold them in escrow as needed. 

The Role of Home Insurance During the Escrow Process 

In many cases, prospective home buyers must first secure reliable homeowners insurance. Lenders typically require buyers to purchase between 10%–20% of the annual coverage premium, depositing those funds directly into your escrow account. 

Needless to say, buying a home can be expensive, and the prospect of protecting your new investment can be stressful. By choosing the right insurance company, you can get the best possible price on coverage that offers the financial protection you deserve. 

How to Determine Your Home Insurance Needs 

Now you know what escrow is and how to navigate the home-buying process. But do you know who you can trust when it comes to protecting your new house? 

Here at Cost-U-Less, we specialize in homeowners insurance that combines competitive pricing with the best customer service in California. Ready to give yourself peace of mind so you can kick back and relax in your new home? Just give us a call at (800) 390-4071 or get a fast and free homeowners insurance quote online. You can also find a Cost-U-Less office near you

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