July 2009

I Hear It All the Time, But What is Real Estate Escrow?

Well, if you want to get technical, Escrow is defined as “a legal arrangement in which a neutral third party holds an asset during the period in which the conditions of the deal is being finalized by the other two parties.” But that doesn’t really help much, does it? Unless you are working with these terms everyday, they can get pretty complicated. Let me see if I can explain it a little bit better:

In real estate, escrow provides a form of mediation between each of the parties involved. This includes the buyers, sellers, lenders, agents, and title company. So in essence, the escrow is simply a holding place for all funds, instructions, and documents necessary for the purchase of the home:

• the buyers funds for the down payment,
• the lender’s funds and documents for the new loan,
• and the sellers deed.

As a buyer, escrow will typically begin when your Realtor delivers the purchase contract and the buyer’s earnest money deposit to the escrow company. The escrow company will then prepare and deliver the initial escrow instructions and other related documentation.

Once your mortgage loan is in place and the new title has been recorded, the escrow agent will prepare and deliver the closing statements to both you and the seller. Be sure to review these statements in detail so you can resolve any inconsistencies before proceeding.

Finally, when the terms of your purchase agreement have been met, the escrow agent will assign the property title to you and distribute the funds to the seller, record the deed, and close the escrow.

Ultimately, the use of escrow is intended to provide security and peace of mind for buyers, sellers, lenders, and real estate agents alike by making sure no funds or property will change hands until all of the terms and conditions have been followed. Keep in mind, the rules and procedures around escrow and closing can vary by region, title company, and lender.

The Skinny on Home Inspections

Let’s face it – we can’t all be experts on living structures. We may know some of the things to look for, but a lot of significant problems go right past our eyes. That’s why I think it’s a good idea to pay a home inspector to thoroughly go over any house you’re planning to buy just to be sure it’s in as good condition as it looks.

Not long ago, the house next door to ours was on the market after it had been “renovated” after 14 years of abandonment. The renovation was only partial, and the years of abandonment had left the home and the lot in very bad shape. When there was finally a contract on the house (according to the “For Sale” sign on the front lawn), an inspector showed up. He asked me questions about the property that no one else had provided answers for. He didn’t know the house had been abandoned for a long time, for example. He said that inspectors had to rely on the neighbors to fill in the blank spaces sometimes.

The home inspector will carry out the following tasks; however, you can ask him to do other things if you have concerns:

• Check the physical condition, including structure, construction, and mechanical
• Report on items that need to be repaired or replaced (he should have a list with details)
• Determine how much more life the major systems such as electrical, plumbing, heating, air conditioning can reasonably be expected to have. He should also estimate the life-expectancy of equipment, the structure of the house, and finishes.
• Test for radon exposure risks.

The inspector is then required to provide a written report of his or her findings. It may take a week or so, though some are finished the very same day.

Saving For a Down Payment

As a country, Americans have not been the best at saving money. A report recently released by the Bureau of Economic Analysis, charts our efforts to save, continually spiraling down, and it indicates the amount we save is minus half a percent. With this in mind, it is easy to see why first-time homebuyers struggle to find a down payment.

Today, the preferred down payment is normally 20%; however, very few people have that much ready money on hand. Although many lenders offer mortgages with less than a 20% down payment, it always makes more sense to save up as much as possible. A down payment has many advantages, as the more you put down, the lower your mortgage will be, which means lower mortgage repayments.

Additionally the higher the down payment is, the more you will be able to pay for a home. Lenders have learned from experience that more homeowners default on their mortgages if a down payment is less than twenty percent of the sale price and for this reason they require you to pay private mortgage insurance until the equity in your home reaches twenty percent of the sale price.

So here are a few helpful tips to help you start saving:

Try saving your tax refund. Change you withholding payoff from 1 to zero. This means your employer will have to pay more to the I.R.S and downgrade you paycheck accordingly. In this way you may receive a larger income tax refund.

Will your parents give you a down payment? The law allows each parent to give a gift of a specific amount without any tax consequences. If this is not possible you may be able to ask them for an unsecured loan, where you give them a better interest rate than they can get from the bank.

If you have served in the armed forces, it is always a good idea to check out government programs, as you may meet the criteria for a loan sponsored by the Veterans Administration.

The government is also running a number of assistance programs for down payments, tailored around the first time homebuyer. There are also neighborhood specific programs to help encourage home ownership in some neighborhoods.