The house buying process takes a lot of time and involves a lot of moving parts. One vital part is housing escrow. Here's what to know about it.

Approximately one-third of all homes purchased in 2019 were first-time homebuyers. The rest are people who’ve bought homes before. 

If you’re a first-time homebuyer, you might assume that people who’ve purchased homes before understand the entire home-buying process. That’s simply not true, though. 

Everyone who buys a house has questions about the process. One question people often have is about the housing escrow required when buying a home.

If you have questions about this, you’re in the right place. This guide will help you understand everything you need to know about housing escrow. 

The Home-Buying Process Requires Many Steps

Buying a house is not something you can do overnight. Instead, you must spend a few years or months planning for this event. You must get your finances in order and work on your financing. 

Once you’re ready to buy a house, you might spend a few weeks or months shopping for a house. Then, you’ll wait while you negotiate with the seller after submitting the purchase agreement to them. 

After that, you’ll have to wait for closing. You might be asking, How long it takes to close on a house?” Normally, it takes anywhere from 30 to 45 days, but it can take longer than this in some cases. 

There are many steps to complete in the process, and that’s why it takes time. You’ll need to be patient through the process, and you must complete your due diligence by completing your part of the deal. 

Your real estate agent will assist you through the steps and will be there to answer all your questions. You’ll also work with your lender, following the instructions they give you. 

Housing Escrow Holds Your Earnest Money

When you write the purchase agreement to the seller, your agent will help you know what to include. A purchase agreement is a legal arrangement that you must think through carefully.

It must state all the necessary things, including the home’s address and property description. It must also include the price you’re offering and any contingencies you’re requesting. 

When you submit this contract, your agent will ask you for a deposit. The deposit is cash that you put down with the offer to show that you are serious about buying the house. Real estate agents call this earnest money. 

Many people wonder where this earnest money goes when they offer a check with a purchase agreement. The answer is that the money goes into an escrow account. 

The account is called housing escrow, and a third party handles this account. The third party is a neutral entity that plays no role in the home purchase.

The purpose of placing the money in a neutral party’s control is to protect it while the buyer and seller work out the arrangements for the home sale. 

How It Works

Now that you know what housing escrow is, you might have more questions about it, such as how it works. 

As a home buyer, you write a check for the deposit when creating a purchase offer to buy a home. Your agent can help you determine how much money you need for this deposit. 

You might need as little as $500 or as much as 10% of the offer amount. In either case, your agent gives this check to the seller’s agent. 

The agents involved in the deal open an escrow account, and they deposit the money into this account. The money remains in the account until you close on the home purchase. 

When you attend closing, the earnest money you provided goes toward your down payment. Therefore, it reduces the amount you owe the seller for the house. 

If you back out of the deal for a legitimate reason, you will get the earnest money back. The agents take the money out of the escrow account to give you a refund. 

When a buyer backs out of a deal without a legitimate reason, the escrow money goes to the seller. The seller keeps the money in this case even though they didn’t sell the home. 

Your Lender Might Also Require an Escrow Account

When buying a house with a loan, there is another type of housing escrow you might hear about in the process. This type is also called a housing escrow account, but it serves a completely different role. 

This type of escrow account is one that the lender requires. The lender tells the buyer that they must use an escrow account to save money for two specific expenses related to the house:

Home Insurance 

Home insurance is something every homeowner needs, yet it’s costly. Most policies require paying annual payments, and most lenders require an escrow account for this expense. 

Property Taxes

Property taxes are also costly, and most counties require paying these semi-annually. It’s often easier saving the money through an escrow account than coming up with the amounts every six months. 

The lender determines how much these expenses cost for the year and calculates the sum. The lender divides the sum by 12 months to determine the monthly amount the homeowner must place in the escrow account.

Each month, the homeowner must pay the required monthly escrow account to the lender when making their house payments. The lender places the money in a separate account to save up for these two expenses. 

When the time comes to pay these bills, the lender pays them with the money the homeowner placed in the escrow account during the year. 

Learn More About the Home-Buying Process

Learning about the required housing escrow is important when buying a house, but it’s also vital to learn about other parts of this process. 

Buying a house requires many steps, and it’s a big event in life. If you take the time to learn these steps before going through with your purchase, you’ll have fewer questions and may experience fewer challenges.

If you enjoyed this article, you might like others on our blog. Check it out today to learn more about the home-buying process.