Understanding the Fundamentals of Escrow

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By Lisa Strunk, Mortgage Loan Officer

An escrow account is a third-party entity that temporarily holds funds or property for a set period of time until a specific condition has been fulfilled. The escrow account is set up to offer protection to both the seller and the buyer.

Escrow might sound complicated, but don’t worry—we’ll break it down for you below!

Why an Escrow Account?
There are two main purposes of an escrow account. The first is to hold onto the earnest money deposit (EMD) until disbursement date of the funds. The EMD funds are collected, with the signed purchase agreement to show the Seller that the Buyer is serious about purchasing the home. If the loan closes, the EMD funds will be applied toward the down payment.

The second purpose is to hold funds throughout the life of the mortgage for taxes and homeowners insurance. Once a loan closes, the mortgage servicer will take a portion of the monthly mortgage payment and keep it in an escrow account until the tax payments and homeowners insurance payments are due.

How is it Determined?
Since tax bills and insurance premiums vary from year to year, a mortgage servicer will project payments for the following year based on how much was paid out the previous year. In order to ensure enough funds are held in escrow, the majority of lenders require a minimum of two months of additional payments to be held in the account upfront. 

An escrow analysis will be utilized by the mortgage servicer to determine whether or not a refund is due to the borrower or if there is a shortage of funds. If there is a shortage, the mortgage servicer will typically allow a choice of a one-time payment of the difference or to temporarily increase the amount of the monthly mortgage payment until the shortage is paid.

Who Manages an Escrow Account?
There are a variety of third parties that can manage an escrow account, including an escrow company, escrow agent (often times, this is the Title company) or mortgage servicing company.

In conclusion, the benefits of an escrow account are for protection during a real estate transaction, along with freedom from worrying whether or not one’s tax bills and homeowners insurance premium will be paid on time,
and in full. 

Apply for a pre-approval with one of our experienced loan officers today at 877.312.9033 or visit MichiganFirstMortgage.com for details.

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