If you’re buying or selling your property, you’ve likely to come across the term ‘escrow’ and wondered what that means. To help you out, I’ve put together this handy post that introduces you to the basics of escrow, and how it’s different from making a down payment on a house.
What is escrow?
Escrow is the term used to describe a legal arrangement whereby a designated third party, like a title agency or attorney office, holds a buyer’s deposit on property until certain conditions have been met. In real estate, escrow is the buyer’s good faith deposit to hold a property until the day of closing.
Is escrow required?
Escrow actually isn’t required, but it’s highly encouraged. If I were representing a seller, I wouldn’t recommend agreeing to take an offer without an escrow deposit that’s commensurate with the property purchase price. The reason being, if the buyer defaults or doesn’t perform according to the contract, there’s no funds to make the seller whole and not much recourse. As a rule of thumb, escrow is typically 1-2% of the total purchase price and can be made within a few days of an executed contract and can also be made in mutiple deposits. For instance, within three days of an executed contract, the buyer may make a $5,000 escrow deposit, and then after satisfactory inspection, perhaps within 12 days of executed contract, make an additional deposit. This shows a buyer’s commitment to the purchase and gives the seller all the warm fuzzies from someone who to buy their awesome home.
How is escrow different from a down payment?
A down payment refers to the cash payment you make at the time of closing to secure your property and it is a huge factor in the type of mortgage you can qualify for. It is usually a percentage of the full purchase price; a 20% down payment is the magic percentage down to avoid PMI (private mortgage insurance) but there are tons of other loan options with down payment’s as low as 0% for VA financing and 3% down for conventional financing.
The fundamental difference between escrow and down payment is that escrow is provided upfront at the beginning of the transaction and this is a buyer’s money that’s at risk if they default on the contract. At the closing, the money that has been placed in escrow can then be put toward a down payment and other closing costs associated with the purchase.
If you’re confused about what an escrow deposit entails, or have any further questions about how financing works when purchasing a property, get in touch with me today, and I’d be delighted to answer any questions that you have.