What is Escrow? 3 Things You Need To Know About Escrow Before Buying a Home

Posted by Lauren Schneider on Tuesday, June 11th, 2019 at 9:46am.

What Is Escrow

The purchase of your first home can be an exciting and exhilarating process. Homeownership is something that many people dream of. Owning your own home means not being held accountable to a landlord. It means the freedom to paint, remodel, and redecorate your space how you like. It means creating the perfect space for you and your family to build a life together and create memories that will last a lifetime.

For most people, the purchase of a home is also the largest transaction they will make. This can be daunting. Few buyers have the resources to buy a home outright, and this can make the buying process even more complicated because lenders are involved too. One of the biggest challenges that new home buyers face is understanding the buying process and all of the lingo that comes with that process.

Often, when a home is sold, an escrow agent is brought in. Today, we're going to look at the escrow process and what that entails.

What is Escrow?

As a buyer, a home is likely to be the most valuable item that you ever purchase. As a seller, your home is very likely your biggest source of savings. For both parties, the process of buying and selling a home can come with its financial risks. What if the seller takes the buyer's money, but doesn't give them the home title? Likewise, what if the buyer does not give the seller the full amount of money as promised, but the seller has already given them the title? The escrow process is supposed to help reduce that amount of risk involved in this process.

An escrow agent is a person that belongs to a neutral third party. This person is not representing the buyer or the seller. Instead, they act as a mediator between the two groups. Their main role is to hold the assets involved in the exchange until the process is completed, and it is clear that both parties will be getting what they had agreed upon. Assets they could hold would include:

  • Earnest money
  • Down payment
  • Financing
  • Title
  • Closing costs
  • Home inspection results

Even if you have not purchased a house before, you may have encountered the escrow process before. Escrow agents do not only help with home sales. They can also help with any very large transaction where risk is associated.

Why is Escrow Helpful?

There are many reasons that a home sale might fall through, and in the event that a home sale does not proceed, the escrow process can protect both buyers and sellers.

Often, buyers will submit a home buying offer that includes contingencies. The offer could suggest that the buyer will pay a certain amount of money for the home given that:

  • The buyer is approved for a mortgage
  • The home passes a house inspection
  • The water is tested and results indicate it is safe
  • There are no problems with the title of the home
  • Etc.

If the results of all these inspections come back perfect, the sale should be simple. However, let's say that the home fails the house inspection. The buyer might still want to buy the home, but they are no longer willing to pay the price that was previously agreed upon. This means both parties will need to renegotiate the value of the home. When all the assets are being held in escrow neither party is at risk of losing what they have already put into the transaction. If the deal fell through at this point, the escrow agent would give the buyer back their deposit and return the title to the seller.

To begin searching Colorado Springs homes for sale, register with Military Home Search. Registration is fast, free, and simple. Afterward, you can use our advanced search filters to help you narrow results down to the most promising properties.

Will My VA Loan Require an Escrow Account?

Depending on which lender you choose to get your VA loan, you may need to have an escrow account. The Department of Veterans Affairs does not require the escrow process to be used, however, lenders often do, and there is nothing that prevents lenders from setting high standards for their customers.

It's worth noting that an escrow agent isn't only helpful given that something goes wrong with a home sale, they are also a helpful organization tool. Moving can be an overwhelming process, and having someone to help you account for all of the financial aspects of a home purchase can be extremely helpful.

How Can You Lose Your Earnest Money Deposit?

If you proceed to closing and purchase the home, there's little risk to your earnest money. There are things that can happen that can cause you to lose your earnest money deposit.  3 main ways are:

Waiving your contingencies on the front-end. In a hot neighborhood or sellers market, buyers may be tempted to forgo protection rights typically built into the contract, making them more attractive to the seller. It can backfire and, in some cases, end up with the buyer losing their earnest money deposit. 

Missing set deadlines. Buyers must adhere to certain deadlines. If they miss them, the seller may work with them to give them extra time, or they may pull the deal. This scenario is considered the buyer's fault, so the seller could pocket the earnest money deposit. 

Changing your mind about buying. Even if you were sure about the house when you made the offer, you may not be now. The pressure of home ownership, an unexpected job offer in another state, or family issues may drive you to pull out of the deal. If you do, you'll probably never see your earnest money deposit again. 

Still have questions about the escrow process? Connect with one of the Colorado Springs real estate experts on the Military Home Search team. We will be happy to walk you through every aspect of the home buying or home selling process.

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