Does any of these requests sound familiar to you?
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escrow (5)
Take a look at this mistake that some closers make.
# 10 Don't be a know-it-all closer.
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Avoiding Problems with Your Escrow Account
If you are using a mortgage to purchase your first home it is highly likely that the lender will request that you use escrow in order to handle the annual homeowner's insurance and taxes on the property. This is reflected by an additional payment on top of the interest and principal payment that you make on the home loan. Ideally, the lender will review this account every year to see if there are overpayments or underpayments and change the escrow accordingly.
Unfortunately, we don't live in a perfect world and companies do make mistakes. Here are some important facts to help you understand the basics of an escrow account.
Taxes
Property taxes are usually reviewed one year after a home has been purchased. At this time the property will likely get a new assessment, which can drastically increase the tax amount. For people that are buying a previously owned home this will usually not be an issue, although you should look at what the current assessment value is. If you are buying a brand new home, or if you have just built a home, then the previous tax amount was based on an empty lot. The existence of a new home will greatly improve the lot's value and subsequently change the tax amount.
Insurance
Before finalizing the loan you will be asked to provide proof of insurance from a licensed insurance agent. The location of your home may dictate a few extras that might not be prevalent in other areas.
For instance, if you are considering the purchase of a home that is close to a river or lake then you may be in a flood zone and subject to flood insurance. Homes that are located in extremely rural areas may be subject to higher premiums if there are no fire fighting stations in close proximity to the home. It is vital that you speak to your Realtor® before buying a home to see if there are any conditions about the home that would result in a higher insurance policy.
Reviewing the Escrow
Every year your lender should mail you a letter that goes over the escrow account for the previous year. It should list all of the payments you made to the escrow account as well as any amounts disbursed from the account to cover your expenses. You should also contact your homeowner's insurance agent and the local tax assessor's office to see if there are any upcoming changes for your tax bill or your insurance bill.
How to Handle Property Tax Increases
Going back to the early example of someone buying a new home or building a home, there is the expectation that the property tax amount will increase tremendously. If the increase is more than $1,000 then the lender will possibly add $2,000 to the escrow account in case the taxes increase again the following year. This presents you with three choices:
- Accept the new escrow amount and pay the additional $167 monthly amount
- Ask your lender if they will spread the extra amount over the next two years to make the monthly amount lower
- If you have the funds, offer to pay the increased tax amount yourself so that your escrow payment does not change.
The real estate industry is just like any other major industry segment. The people that work within the industry use specific phrases and words that are not too common in other types of work. Understanding some of the common jargon will help first time buyers feel a little more comfortable with the process.
Mortgage – This is a loan that provides the financing for the purchase of a home. Buyers will sign a promissory note that explains the terms of the loan. The interest rate, amount borrowed and number of payments required to repay the debt are all laid out in this document. A mortgage is different from a car loan or a credit card since a piece of property is used as collateral for the loan.
Appraisal – This is a report that explains the home's value. A professional appraiser will inspect the home and then compare it to other similar homes in the nearby area. Based on common criteria such as location, square footage, age and amenities the appraiser assigns a market value to the property. This is slightly different from a home inspection. A home inspection is designed to point out any areas in need of repair or replacement. An appraisal simply decides how much a home is worth as it currently stands.
Contingency – These are requirements spelled out in the real estate contract that must be completed or met in order for the sale to go through.
For instance, most contracts will have a contingency concerning the appraisal. If the home is not worth the sales price then the buyer may be able to get out of the contract.
Escrow – This refers to the funds, assets or securities being held by a third party separate from the buyer and seller. The buyer will place funds in escrow as proof that they wish to go forward with the sale. Once the seller has met the conditions of the contract the funds will be released.
Disclosures – The buyer must be informed of various details by the seller prior to the purchase. Each area will have slightly different requirements for the disclosures in their location. An example would be the location of a home in a known flood zone. This would affect the homeowner's insurance and could affect the buyer's ability to pay.
Closing – This is the last phase of the property purchase. All parties involved in the transaction will meet at either an attorney's office or an escrow agent's office (title company). The seller, buyer, and any attorney will typically attend the closing. At the closing the seller will receive funds for the transaction and the buyer will sign the necessary documents for the loan. The deed will be transferred from seller to buyer. Finally, the closing costs will be paid based on the agreed terms in the contract.
I represent a seller who has a first and a second with B of A. The second is a HELOC. The file is hardly short but just short enough that we needed to request a debt relief on the HELOC.
This file went very smoothly through Equator since we started it on January 19th. By March 18th we had a counter offer and on March 23rd we had an approval letter for escrow to begin closing the file. Very cool!
The buyers completed all of their inspections, new loan contingencies are completed, seller vacates the home for possession by April 1st, buyer signs his loan documents in escrow and the file funded! HALT!~ Step away from the transaction……..there has been a development.
Equator or Bank of America is requesting a strange payoff for each loan. Remember that the first is not short and is scheduled to be paid in full. The second or HELOC is the short one. Well, Bank of America is requesting that escrow pay the first trust deed $244,000 on a $190,000 balance and $12,000 towards the second on a $115,000 balance.
Is this feasible? I suppose, maybe. How will escrow explain this to title? What most concerned me is the amount of the forgiven debt on the recourse loan which could lead the seller into some serious state income tax issues.
We have been trying to get an explanation from our negotiator through the Equator system and have had zero response. Three calls a day to all departments with no answers either. The buyer’s loan has now been refunded and all parties are very discouraged as you can imagine. Any idea on how to proceed? The file is still showing as approved until May 3rd.
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