Purchasing a property comes with a good amount of new terms. From balloon mortgages to equity returns, it’s almost always a learning process for the aspiring land buyer.
The term “escrow” can be confusing to many, even after multiple explanations. However, it’s a very important final step in getting to the finish line that is owning property.
Santa Cruz Properties and our experienced staff have gone through this process many times and are ready to assist you every step of the way. Whether this is your first time learning about escrow or forty-first time dealing with it, here’s everything you need to know.
What is Escrow?
The literal definition of escrow is “a bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled.” With owner-financed lots, the third party will hold large sums of money or property and the condition is usually the fulfillment of a purchase agreement.
This money is also referred to as “earnest money”. The amount needed will vary, but in general, it’s 1% to 2% of your property’s final purchase price. A neutral third party holds these funds to protect the buyer and seller during the purchasing process. The process is beneficial to both, as it guarantees the seller that the buyer has funds needed and guarantees the buyer that the seller has the ability to provide a legitimate title.
Finding a Title Company
A title company will first ensure that your title is legitimate, then will issue a title insurance for the property. This title insurance will protect the owner from lawsuits or claims levied against the property resulting from title disputes.
A title search is a tedious process, which consists of a thorough examination of property records. This ensures that the seller owns the land legally and it cannot be claimed by anyone else, either partially, fully, or otherwise.
Finding an Escrow Agent
Many times, your title company can facilitate the process of securing an escrow agent. You can assist by researching and having questions ready. Things to look for in an escrow agent are their independent or neutral status, their resources, their experience, and the cost.
Experience means they will not only have knowledge on the process, but they will also be able to explain how it works to you. Much business is done online, especially this year, and your agent should have new, updated resources. E-signatures, digital security, and cloud technology will help the process move along quicker and more efficiently.
Your chosen agent will handle financing, mortgage refinancing, title transfers, transaction instructions and other paperwork needed for completing the process.
Escrow for Taxes and Insurance
While the escrow account and funds used to purchase your land is a short-term account, a second escrow account for taxes and insurance will be used through the life of your loan. When you enter into escrow agreements, your lender will calculate your monthly payment to figure out the funds needed to maintain your mortgage.
Your lender will then use this account to pay the property taxes and homeowner insurance payments when due. This is a sigh of relief for many owners, as it guarantees the bills are paid in time and a lien won’t be placed on your property for missed payments.
When It Comes to Escrow, Keep This in Mind
There may be costs that need to be prepaid, such as your first year of insurance. Your monthly mortgage payments will then be funding the second year, and so on.
- Your property tax is $3,600 per year.
- This number is divided by 12 months, or one year of payments, equaling $300 a month.
- If your lender needs three months of property tax payments, the three payments of $300 will be a total of $900 that cover these taxes.
The amount paid into your escrow account also varies on the amount paid for property taxes and homeowners insurance. In general, about a twelfth of the total cost of your annual property taxes and insurance will be needed.
- Your property taxes are $3,000 and your insurance is expected to be $600.
- You’ll pay a total of $3,600 for the year, or $300 per month.
- This extra $300 will be sent with your mortgage insurance for your lender to deposit into your escrow account.
Real Estate Transaction (RET) vs. Owner-Financed Transaction (OFT)
In an RET, your bank will deliver the funds and the seller will deliver the property deed. In an OFT, the owner (or seller) will deliver the property deed. In both, the buyer will deliver a down payment, but an RET will pay the bank and OFT will pay the owner the entire purchase price. A closing agent will run a title search, backed by a title company, and deliver the legitimate title for both as well.
With owner-financed transactions, however, there are many clear benefits over an RET such as cutting costs from the application and appraisals process and purchasing title insurance.
When It Comes to Buying Land, Trust is Key
While escrow services are not a requirement when purchasing a property under an owner-financing option, finding a buyer and company that you trust will ensure the process is easier, legitimate, and beneficial to all parties.
Santa Cruz Properties brings experience, honesty, and beautiful lots to those seeking property for sale in Edinburg and have done so for over 25 years. We strongly believe that land ownership should be accessible to everyone, regardless of bad or no credit history,
If your dream is property ownership, we want to help you. Take a look at our available lots in Edinburg and elsewhere throughout Texas today!