Couple reviewing paperwork with agent

The term escrow has multiple meanings

Have you ever driven by a home for sale in your neighborhood and noticed the realtor’s sign changed from “sale pending” to “in escrow?” This new sign indicates that a buyer made an offer, and their earnest money check is being held in an escrow account. Being in escrow during the homebuying process is not the same as having a mortgage escrow account. A mortgage escrow is an account for paying your property taxes and insurance premiums after your home sale has closed. Although both types of escrow are related to holding funds, the term “escrow” has multiple meanings.

Escrow for homebuyers

When you’re buying a home, you’re in escrow between the time the seller accepts your offer with your earnest money deposit and closing day. Also called good-faith money, earnest money is a percentage of the sale price that’s set aside to reassure the seller that you’re serious about purchasing a property. This deposit is collected by an escrow agent and held in a trust account until the sale closes. When your home purchase goes through, this deposit is usually applied towards your down payment and closing costs.

What’s an escrow agent?

An escrow agent or escrow officer safeguards the legal documents and funds related to the home purchase until all agreed conditions in the contract are met. An escrow agent can be a settlement attorney or a representative from a bank, escrow company or title company. The agent’s primary responsibility is to remain a neutral third party between the buyer and seller while ensuring the completion of all of the necessary steps to close. In addition, they will help protect your interests if there’s an issue with the home sale.

Escrow account for homeowners

Also known as an impound or trust account, a mortgage escrow account is a way for borrowers to pay the costs associated with owning a home. A portion of your anticipated property tax bill and hazard insurance premium is added to your monthly mortgage payment so that when each becomes due, the servicer will have funds in your account to pay them. If flood insurance or private mortgage insurance (PMI) is required, these fees will be included in your monthly payment.

One of the most significant benefits of a mortgage escrow account is peace of mind. Rather than worrying about paying a big annual tax and insurance bill all at once, you’ll spread those costs into monthly installments. With an escrow account, you’ll also never be late on your property tax payments because your loan servicer will pay them for you on time.

When does a borrower need an escrow account?

The types of mortgage loan programs that require a home escrow account are government-backed loans such as Federal Housing Administration (FHA) loans, VA loans and United States Department of Agriculture (USDA) loans. Typically, Conventional loans with a loan-to-value ratio over 80% (over 90% in California) also require an escrow account.

Are you looking formore mortgage escrow account details? Learn more with these helpful FAQs about escrow accounts and payments. If you have questions about your escrow account, we’re here to lend a hand.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.