Many borrowers are confused when it comes to prepaid items and escrow accounts and what role they play when it comes time to figuring out closing costs. Here is a breakdown of all the information borrowers need to know.
Escrow Accounts Defined
Escrow Companies act as at third party buffer between buyers and sellers. Escrow coordinates the overall property purchase transaction. They handle ordering Title Reports and Title Insurance from the Title Company, collect all of the loan documents, draw up the necessary legal documents, collect funds and more for the purchase transaction.
An Escrow Account is specifically for funds to be held and dispersed for future payment. The funds saved in an escrow account are used to pay for homeowner’s property taxes and insurance premiums. These accounts are typically funded each month whenever a borrower makes a mortgage payment.
Escrow accounts are usually only required if a buyer is putting less than 20% down and are always required when using an FHA loan.
Is It Risky to Use Escrow?
Escrow companies and accounts are highly regulated and licensed. Because of this, it is very unlikely that they will ever disburse funds improperly or overcharge a borrower for something. JVM sees many clients who are unnecessarily concerned about using escrow accounts because of the large sums of money being deposited into them.
Furthermore, many realtors have relationships with experienced escrow officers who are worth their weight in gold because they foster much smoother transactions. Unless a buyer is looking to purchase a foreclosure, they can work with their realtor to choose the escrow company that handles their transaction and funds.
Prepaid Items Defined
Prepaid items occur when a buyer deposits money into their escrow account for real estate related expenses that have not yet occurred. For example, a buyer may be asked to prepay a year’s worth of home insurance premiums into their escrow account.
Prepaid items are different from closing costs because buyers are paying for fees that have not happened yet in advance. Prepaids are still paid on the same day as additional closing costs.
What Buyers Need To Pay At Closing
Closing costs can vary from state to state and are also dependent on the property type. Closing costs accrue from lenders and third parties (escrow) that are involved in a buyer’s loan transaction. Buyers in California can typically expect to pay closing costs between 2% and 3% of their home’s purchase price (depending on price, discount points, transfer taxes, and other factors).
JVM has some of the best Closing Specialists in the business who will provide a precise breakdown of all closing costs and prepaid items well in advance for borrowers.