How Does Escrow Work for Home Purchase?


Quick Answer

The first form of escrow involved in a home purchase is the account where a buyer's earnest money is held before the closing. At the point of close and during the mortgage, a homeowner typically pays home insurance and property taxes into a separate escrow account, according to SFGate.

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Full Answer

When a prospective buyer makes an offer on a house, that buyer typically puts up 1 to 2 percent of the purchase price as an earnest deposit, according to the National Association of Realtors. To protect the interests of the buyer, the money is retained in escrow prior to the close. If the buyer fails to fulfill his contract obligations, he can lose the escrow deposit. If the close goes through, the deposit goes toward the purchase price.

The lender on a home purchase often requires that a buyer include installments toward home insurance and property taxes in their monthly mortgage payments, according to SFGate. The actual payments to the insurance company and taxing authority are only made once or twice a year, though. Therefore, the installments are held in an escrow account until full payments are disbursed. At the time of closing, lenders usually require an escrow deposit to cover the first payments plus a couple months of cushion, according to SFGate.

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