The process of buying a home and other real estate generally involves multiple steps and moving pieces. At various points in a real estate transaction, parties other than the buyer and seller become involved in order to ensure the integrity of the transaction. An escrow agreement is one way to protect both the buyer and seller during the final stages of the transaction. In a real estate escrow agreement, the buyer and seller agree to have a neutral third party — an escrow agent – hold the buyer’s funds while the contractual conditions and obligations of each party are fulfilled. Escrow accounts provide protection to all parties involved in the transaction. Attorneys and title companies commonly provide escrow services during a real estate transaction.
Real estate escrow accounts are also used in other contexts. Homeowners with a mortgage on their home may set up an escrow account at the request of their lender. Escrow accounts in the mortgage context function primarily as savings accounts, in which the mortgage servicer will deposit a portion of the homeowner’s monthly payments into the account to cover estimated property taxes and insurance premiums.
If you are in need of an escrow attorney or any help in setting up an escrow agreement, our knowledgeable real estate attorneys at the Law Office of Yuriy Moshes have extensive experience in New York real estate law and can assist you at any stage in the house escrow process. Contact our law office today for guidance on real estate escrow accounts or any associated agreements.
Escrow accounts in real estate transactions, while not required by law, are common in New York. Mortgage lenders often request that the buyer use a real estate escrow account to safeguard funds while the buyer performs any necessary due diligence like inspecting the home and performing a title search. If you are looking to purchase a home in New York, it will be helpful to know some basics about how the process works.
Once a buyer has decided to purchase the property, there will likely be a phase during which the buyer and seller negotiate the final price and the buyer arranges for a home inspection. Even after both parties have agreed on a purchase price, neither party is obligated to go through with the deal until they have signed a formal contract that embodies all of the terms and conditions of the deal. Typically, both sides retain real estate attorneys to draft and negotiate the contract. When a buyer signs a home purchase contract, he must give the seller a down payment, normally 10% of the total purchase price. This deposit is also often termed “earnest money” and signals to the seller that the buyer is serious about purchasing the property.
It is at this point in the transaction that an escrow account becomes useful. Instead of providing the funds directly to the seller, the buyer can instead deliver the amount to a third party (often the seller’s attorney or real estate broker), who would place the funds in an escrow account. A property is “in escrow” when the trusted third party (the escrow agent) has secured the funds from the buyer and placed them in an escrow account. Funds in the escrow account cannot be released to the seller until certain agreed-upon conditions have been met.
Prior to delivering the funds to an escrow agent, prudent buyers will likely want to create an escrow agreement that specifies the obligations of all parties involved (namely, the buyer, seller, and escrow agent). An escrow agreement typically contains:
It is advised that the home purchaser consult with a real estate attorney or closing attorney for formulating and negotiating the escrow agreement.
In the event that both the buyer and seller cancel the contract, the funds in escrow typically revert to the buyer. However, depending on the timeline and conditions set forth in the agreement signed by the parties, the funds may go to the seller.
Escrow accounts can offer a number of benefits to parties involved in a real estate transaction – namely, the home buyer, homeowner, and lender. They are a mechanism for building trust, reliability, and credibility. In essence, escrow accounts help bolster the integrity of a real estate transaction.
For home buyers, placing the initial good faith deposit in escrow allows them to finish any home inspection or other due diligence without having to worry about losing that deposit to a seller that refuses to refund the money if the buyer finds something objectionable about the house.
For the homeowner making mortgage payments, an escrow account allows the homeowner the convenience of paying a lump sum every month that covers taxes and insurance without having to keep track of different amounts due or deadlines. The mortgage servicer will instead be responsible for apportioning funds towards taxes and insurance. Delegating the responsibility of paying for taxes and insurance to the mortgage lender also adds predictability to monthly payments. Some lenders even provide a discount on the interest rate or closing costs for having an escrow account.
It is often in the lender’s interest to have control over the payment of taxes and insurance. If taxes are not paid, the tax authority may place a lien on the property, and the lender may risk losing money in the case of foreclosure. Additionally, ensuring timely insurance payments guarantees coverage when there is damage to the home. Escrow accounts allow lenders to exercise some control over these factors.
There can be some disadvantages to maintaining an escrow account, particularly in the mortgage escrow context. Firstly, there may be higher upfront costs; the lender may for example ask for a portion of annual tax and insurance payments at mortgage closing when the homeowner typically has a number of other fees and payments he is responsible for. Monthly payments to the mortgage lender will likely be higher than they would otherwise be as well. Escrow accounts are also hard to get out of later. Some may also feel that by placing funds in an escrow account that they are losing out on potential interest or capital gains they could earn by channeling those funds elsewhere.
Escrow accounts in real estate are commonly used in two contexts: in the process of purchasing real estate and in payments from a homeowner to mortgage lender made towards taxes and insurance.
Of course, escrows are used outside of the real estate context as well.
Escrow accounts used in the home buying process protect the buyer, seller, and lender during the transaction. Using escrow gives the seller reassurance that the buyer is acting in good faith and not perpetrating some sort of scam. The buyer and lender are similarly protected from a dishonest seller that may use funds inappropriately or refuse to refund when the buyer no longer wants to move forward with the purchase.
Mortgage escrow accounts are used to hold funds allocated towards taxes and insurance. The mortgage servicer usually manages these accounts.
Escrow agreements are common in real estate transactions. A prudent home buyer may be interested in using an escrow account to pay for the initial deposit to the seller. Setting up an escrow account involves an additional party, and all three parties will likely decide that they want the terms and conditions of the escrow embodied in a contract. Lawyers can help facilitate the process and make sure their client’s rights and needs are represented.
The real estate attorneys at the Law Office of Yuriy Moshes are experienced and knowledgeable about drafting and negotiating escrow agreements. Regardless of whether you are a home purchaser or homeowner, we can help you. Contact our office today for guidance on real estate escrow accounts and agreements.
Mortgage escrow accounts typically cover property taxes and homeowners’ insurance. They, however, generally do not cover utility bills, homeowners association payments, personal property insurance, or supplemental tax bills.
There is no federal or New York state law that requires the use of an escrow account in a real estate transaction.
In some cases, however, a mortgage lender requires that a homeowner use an escrow account. Loans insured by the US Federal Housing Administration, for example, require that homeowners set up an escrow account to be managed by the lender. Other mortgage servicers may allow the homeowner to manage tax and insurance payments themselves.
In the home purchasing context, some mortgage lenders require that the buyer use an escrow account during the transaction.
Even if there is no requirement to use an escrow account in the home purchase context, using such an account may provide additional protection to all parties involved in the transaction. It may be helpful to consult a real estate attorney or your closing attorney for advice on using an escrow account and moving ahead with an escrow agreement.
In the home purchasing context, if both the buyer and seller decide to end the transaction, the funds in the escrow account typically revert to the buyer.
What happens to the escrow money will also depend on the terms and conditions of the purchase and escrow agreements. If either contract contained deadlines for the performance of certain steps in the purchase process (such as home inspection) and the buyer is not timely about reporting problems with the property, the seller may be entitled to keep the escrow money even if the buyer backs out of the deal.
It is, therefore, advised that a home buyer consult a real estate and/or closing attorney during the home purchasing process. An attorney can make sure that the buyer’s interests are adequately represented in the contract and can give the buyer proper advice before any money is placed into escrow.
In the home purchasing context, a third party that is not the buyer or seller manages the escrow account. In the mortgage escrow context, the mortgage servicer typically manages the escrow account.
The party responsible for paying varies depending on what is negotiated between the buyer and seller. Sometimes, the fee is split between the buyer and seller. At other times, one party takes responsibility for the entirety of the fee. Regardless of who pays the fee, the purchase agreement should clearly state which party is responsible for the fee
For home purchasers nearing the closing and whose future home is “in escrow,” it is important to avoid doing anything that would jeopardize your ability to qualify for a mortgage.
Be vigilant about changes to your credit. Avoid anything that may cause your credit score to drop. Be careful about any new inquiries or increases in credit card balance. The lender will likely investigate if your credit score decreases.
Refrain from quitting or changing jobs. Lenders prefer a steady job history. If your employment situation changes, the lender will likely have to re-evaluate your finances and extend the escrow period.
Do not go MIA (“missing in action”) or be difficult to contact. You want to be available to answer any questions from the lender and to demonstrate that you are reliable.
Do not do anything that may increase your debt-to-income ratio. This includes buying or leasing a car and anything major purchase that majorly increases your bills.
Purchasing a home can be exciting, but it is also inevitably a complex process, consisting of multiple steps and moving parts. All home buyers will eventually have to deal with contracts and negotiations during the transaction. Escrow accounts are very common in New York real estate transactions. The escrow agreement and negotiations pertaining to it are typical and important. It is crucial to properly represent your interests at this stage so that you don’t run into problems later down the line.
Whether you are someone looking to purchase a home or a current homeowner, our experienced and knowledgeable real estate and closing attorneys at the Law Office of Yuriy Moshes can help you. Contact our law office today for guidance on real estate escrow accounts and agreements.