Getting Prequalified for a Mortgage: How Does It Work, and Is It Worth It?


 

If you’ve ever asked yourself how much mortgage you can afford, getting prequalified is one of the first ways to find out. The process is actually pretty quick and easy, and you don’t really have anything to lose. It is worth understanding exactly what a mortgage prequalification is, though, so with that in mind, let’s find out more.

What Is a Mortgage Prequalification?

A mortgage prequalification is a lender’s estimate that lets you know how much you can take out in a loan. It’s a very basic form of loan inquiry, and if you’re looking to buy a home, it’s one of the first items you should add to your to-do list. This will give you a better idea of the budget you’ll need for purchasing a house and also allow you to explore different mortgage options.

How It Works

Applying for a mortgage prequalification is surprisingly easy. To get started, you’ll need to first shop around for several lenders. Nowadays, many banks and creditors provide online forms that take a few minutes to fill in and submit. For a prequalification, the lender will only need basic information such as:

  • Your name and address
  • Contact details
  • A figure for your stable monthly income
  • Basic data on your bank accounts, savings and other assets
  • Your desired loan amount and, sometimes, how much you can put as downpayment
  • A credit check

Some lenders may not take a close look at your proof of income and assets, although they can do a background check on your credit report and history. It’s worth pointing out that applying for mortgage prequalification is considered a soft inquiry and will not impact your credit score. Once the lender has all this information, they will use it to assess your creditworthiness. The data will help them determine whether they can grant you the loan you’re looking for or whether granting you a loan is feasible, to begin with.

The process itself is quite speedy, and you can expect an answer from the lender within a day or so. If the response you receive is positive, you can either pursue things further with the lender and discuss a loan application or preapproval or just leave it as a loan inquiry.

Prequalification vs. Preapproval

Although mortgage prequalification and preapproval sound similar, the two processes have different requirements and implications.

To better understand the differences, think of a prequalification as just an inquiry that tells you how much you can borrow, with no strings attached. At this stage, lenders are also prospecting you as a potential client. However, mortgage prequalification is not a guarantee that your loan will be approved or that you will be approved for the amount discussed throughout the process.

On the other hand, mortgage preapproval involves a closer look at your creditworthiness. The paperwork requirements are different, and you will need to provide pay stubs, bank statements and tax records on top of meeting the lender’s credit score requirements. All information will be closely scrutinized, and the lender will provide an answer within up to 10 business days. If you are preapproved, the lender will send you an offer, usually valid for 90 days.

Last but not least, a traditional mortgage preapproval counts as a hard inquiry, lowering your credit score by a few points, whereas mortgage prequalification does not.

Is a Mortgage Prequalification Worth It?

Absolutely! For starters, mortgage prequalification is a quick and free process that will instantly let you know just how likely you are to buy your dream home. It will let you know whether you’re in a financial position to purchase real estate or whether you should postpone it for a few more years. Buying a home can be a stressful process, but if you can dedicate an afternoon to filling in a few forms, the peace of mind it provides is well worth the time invested.

Being prequalified will also give you more leverage when dealing with sellers. It lets them know that you are committed to purchasing their property and can also leave room for negotiation. What’s more, your offer can carry more weight when compared with offers from buyers that are not prequalified, let alone preapproved.

If you manage to obtain a mortgage prequalification from a lender, it’s also worth pursuing matters further and discussing a preapproval. Keep in mind that a prequalification is no guarantee for the loan. However, a preapproval letter brings you one step closer to securing a loan and can even lock interest rates in place for the next 90 days. In fact, being prequalified can also give you preferential access to loans and speed up the preapproval process.

Everything You Need to Know about Asbestos in the Home

The thought of having asbestos in the home can worry anyone. But is it as bad as it’s made out to be? Before you panic, it’s worth knowing a little more. So with that in mind, read on to find out what it is, how to identify it, and if you should be worried about it or not.
 

What Is Asbestos?

Asbestos is a naturally-occurring mineral made out of thin, hair-like fibers. It has been used as a building material for millennia, primarily due to its fireproofing and insulating abilities. Asbestos began enjoying increased popularity starting with the late 19th century, when its use became ubiquitous, from bricks and concrete to fireproof insulation, drywall and flooring.

As medical research began to highlight the health dangers associated with asbestos, this material began to gradually decline in popularity. Some of the health concerns included an increased risk of lung, stomach, ovarian and kidney cancer, as well as other respiratory and gastrointestinal illnesses.

Today, the use of asbestos is banned in 66 countries. Canada made it illegal to import, manufacture, sell and use asbestos products on 31 December 2018. In the U.S., the Environmental Protection Agency issued an asbestos ban in 1989, but the ban was overturned two years later. Although the use of asbestos in homes has declined after 1980, this material is still not completely illegal in the U.S.

Which Household Products Contain Asbestos?

If your home was built between 1920 and 1989, there’s a high chance that you can find asbestos in paint, plaster, pipe and wall insulation, drywall, vinyl flooring and linoleum, caulking, roof shingles and corrugated panels.

Asbestos could also be found in appliances such as heaters, ovens and stoves, dishwashers, fridges, and even toasters. In such cases, asbestos was used to insulate heating elements and electrical components. You can also find asbestos in old cars, in parts such as brakes, clutches, gaskets and hood liners.

Traces of asbestos contamination have been found in products that contain talc, from baby powder, children’s toys and crayons, to adult cosmetics. In addition, vermiculite, a mineral used in construction as well as a soil amendment for indoor plants, can also become contaminated with asbestos.

Identifying Asbestos

Identifying asbestos in your home can be tricky because it has no smell or taste, and its color and texture can change depending on what materials it has been mixed with. Also, it can be found in a wide range of items, from construction materials to household appliances. Of course, some items such as popcorn or stucco ceilings are a common giveaway for asbestos use. Most of the time, however, it’s almost impossible to identify asbestos just by looking at it.

If you’re worried that your home may contain asbestos, the best solution is to contact a licensed testing and removal professional. They will be able to identify asbestos in construction materials and other household items and advise if they pose a threat.

Should You Worry If Your Home Has Asbestos?

Asbestos has a long and well-researched history of negative health effects. So, to put it shortly, yes, asbestos is dangerous. Breathing in or ingesting asbestos can result in serious illness, and although patients can live with asbestosis for years, the damage done to the lungs cannot be reversed.

However, just because you live in a home with asbestos doesn’t mean your health is immediately put at risk. In this regard, asbestos is very similar to lead paint. As long as the material is in good condition, without any signs of damage, asbestos is not hazardous. In fact, if you do find undamaged asbestos in your home, the best thing you can do is simply leave it alone.

On the other hand, damaged asbestos can release microscopic fibers into the air, which do present a health hazard. Therefore, if you have items in your home that you either know or suspect contain asbestos, check them regularly. Signs of damage include cracks, tears, abrasions and water damage. Once you find a damaged item or area, do not touch it and contact a professional as soon as possible.

Removing Asbestos From Your Home

Removing or repairing damaged asbestos in your home is not a job you should do yourself. If the damaged surface is disturbed, it’s very easy to breathe in the microscopic particles, and even brief exposure to asbestos can have unpleasant health effects.

Asbestos removal should always be carried out by a certified contractor. Admittedly, there are no laws that prevent you from handling the removal yourself, yet the hazards associated with such a DIY project far outweigh any cost-cutting. Not only that but asbestos waste can only be disposed of in landfills designated explicitly for this purpose. Therefore, to save yourself the trouble and protect yourself from any health risks, it’s always best to leave the job to a professional.

 
 

What Is a Lien on a House?

 

Liens often have negative connotations for homeowners. Yet if you’re reading this article, you may be surprised to find out that you already have a lien on your home and that liens are not always as bad as they sound. Here’s what you need to know.

Understanding How Liens Work

A property lien is a legal claim against a property, allowing the creditor to use it as collateral to collect what they’re owed if the debtor cannot make payments.

Consider this common scenario to better understand how liens work: taking out a loan to finance a purchase. To secure loan repayments for the duration of the contract, the lender will use one of your assets as collateral. In most cases, the chosen asset will be your home. However, if you fail to repay the loan through some unfortunate circumstances, the lender can file a property lien on your home with the local county office. This gives them the legal right to force the sale of the property to recover the amount they’re being owed.

In the U.S and Canada, the most common property liens result from falling back on mortgage payments. Yet homeowners can also be faced with a lien if, for example, they fail to pay taxes and even bills of contractors working on their property.

Types of Liens

Property liens can be split into two main categories: consensual (or voluntary) and non-consensual (involuntary). Let’s take a closer look at each one.

Consensual or Voluntary Liens

As the name suggests, a consensual lien is one that you consent to. In the simplest of terms, any time you take out a loan, you voluntarily agree to have a consensual lien. Taking out a mortgage loan is the most common example, but liens can also occur when taking out a line of credit. In the case of a mortgage, your home is used to secure your obligation to pay for the newly acquired asset. And as long as you stay on top of the payments, you will retain ownership of the property.

Involuntary or Non-consensual Liens

Involuntary liens are any liens attached to your property without your consent. They result from local laws being enforced and can be put on a home by a lender, a tax authority or a legal judgment.

  • Mortgage lien: this lien may start as consensual, but if you default on your payments, the lender has the legal right to take possession of your home and sell it to recuperate losses. Out of all property lien types, this one is the most likely to result in foreclosure if you are more than 120 days overdue on payments.
  • Tax lien: if you fall behind on paying your property or income taxes, the state may put a tax lien on your home. As with overdue mortgage payments, the taxing authority can sell the property through a foreclosure to settle the debt.
  • Mechanic lien: this type of lien occurs if a mechanic or contractor is not paid for the work they performed on your property. In some cases, it can also occur if the contractor did not pay their supplier for the materials used for the work.
  • Judgment lien: occurs when a creditor wins a lawsuit against a debtor, and they become entitled to the funds resulting from the sale of the debtor’s property to settle the debt. It can result from loan nonpayments, but also in case of accidents and injuries where insurance is not enough to cover medical bills, for example.

Is It Bad to Have a Lien on Your House?

The short answer is: it depends. For example, consensual liens will be visible on your credit report, yet as long as you’re up to date with your payments, they do not damage your credit score. In fact, consensual liens can benefit your credit score, letting banks and lenders know that you are a trustworthy borrower.

Liens become problematic if they are the result of nonpayment. Keep in mind that your payment history makes up a significant part of your credit score, and late payments can deduct valuable points. In addition, tax, mechanic, and judgment liens will remain on your credit report for seven years, so it’s best to avoid them at all costs.

An involuntary lien can also make it difficult to sell your home. And, in a worst-case scenario, you can even risk losing your property altogether if it goes to a foreclosure auction.

Removing a Lien From Your House

The best way to remove a property lien is to pay off your underlying debt. Alternatively, you can also negotiate a partial payoff with the lienholder or, in the case of judgment liens, file a lien avoidance motion with the Supreme Court.

 
 

8 Amenities that Seem Like a Good Idea, but Actually Aren’t


House hunting is an exciting time that promises a chance to change your life. Many of us will admit to getting a little carried away while seeking out a new abode, especially when it comes to getting drawn in by amazing amenities.  

But don’t fall for it. Often such features add a considerable sum to the price tag, and end up neglected at best, and a downright nuisance at worst! Let’s take a look at 8 amenities that seem like a good idea, but actually aren’t.

A huge yard…

We all dream of wide-open spaces and fresh air, and when a home with a huge yard comes on the market, you might be sold outright. However, how much yard space do you actually need? Unless you’re an extremely keen gardener with plenty of time on your hands, you might find that the yard is simply too much work for even the most avid hobbyist. Mowing the lawn becomes an epic chore, while weeds and plants become overgrown and tangled. Fixing it may require the services of a pro, but for such a huge piece of land, it won’t come cheap!

… With a pool

Ah, the pool! Seen as one of the best ways to chill out on a hot day and have fun, it’s also great for exercise and socializing. But pools need almost daily maintenance, or you run the risk of yours quickly becoming dirty and unusable. If you don’t have the time, it’s best to hire a company to take care of it. If not, you may soon end up resenting the green, slimy waters that once seemed so promising!

Outdoor kitchen

Like a pool, an outdoor kitchen sounds like a great idea for entertaining guests during the heat of summer. But what about the rest of the year? Unless you live in the hotter parts of the country, the chances are your yard is out of action for a large chunk of the year. During this time, your outdoor kitchen can get dirty and covered in moss if you’re not careful. Furniture will suffer a similar fate, and when the sun does start shining again, you might not be so keen on making use of it!

Open space floor plan

There’s no doubt that open space floor plans look fantastic in online photos or in magazines. However, looks can be deceiving, and when you actually live in a house with an open floor plan, you might begin to regret your choice. Privacy is difficult when there are no walls to divide the home up, which can be a real challenge for families big and small. Additionally, such spaces can act as echo chambers, making everything seem louder than it is. And, with fewer walls to put shelves up on or push furniture against, you can lose out on a lot of storage space.

Second bathroom

A downstairs guest bathroom sounds great in theory, but in practice, they’re nearly always located off the dining room or kitchen. Few of your guests will want to go about their business next to the busiest parts of your home and will typically make use of the more private main bathroom upstairs. As such, your second bathroom may soon become an improvised storage area.

High-end kitchen

Budding chefs can easily be enticed by a high-end kitchen, with top of the range, professional-level appliances. Such a kitchen can add thousands of dollars to a home, and while you may imagine yourself cooking up delicious delicacies on a daily basis, the chances are you won’t be cooking up anything you couldn’t make in a regular kitchen. These kitchens are normally quite large as well, meaning more space to clean, more nooks and crannies to de-grease, and probably more kitchen problems to stay on top of.

Spiral Staircase

Spiral staircases are a romantic idea and feature heavily among fairy tale castles and exquisite palaces. Squeezing the concept into a regular home doesn’t always work, however, and what seemed like a good idea at first glance, can soon become a daily irritation, especially if you need to carry bulky laundry baskets up and down the stairs. Besides that, the often-narrow steps can present a tripping hazard, and again, you lose out on storage space.

Designer bathroom

Another magazine classic, the designer bathroom looks beautiful. Sleek and elegant, the bathtub takes center stage, while a pedestal sink dazzles in the background. What the photos neglect to show are the cleaning products that are scattered around the floor, for the want of a cabinet to house them, or the trouble you might have squeezing into such a sleek and slender bathtub!

Homes that offer a little extra something can often lure you in, and before you know it, you can’t imagine life without that swimming pool with a built-in wave machine. Try not to give in, however, as amenities like these often mean more work than fun, and many design elements are often simple cosmetic features with no real-life value.

 
 

Cannery Brewing participating in pilot program aimed at recycling plastic beer can holders and yokes

 

Cut down on beer waste

Penticton’s Cannery Brewing is part of a provincial pilot program aimed at reducing plastic waste that ends up in local landfills — specifically in their case, beer can carriers.

Cannery is participating by setting up a recycling station in the taproom where you can drop off your used four and six-pack can carriers and yokes, where they will be picked up for processing.

The four-packs will be sanitized and re-used, and the six-pack yokes will be properly recycled.

Plastics from Cannery or any other brewery are accepted.

Find the recycling drop off box right inside the door to their taproom during opening hours.

9 Home Renovation Scams to Avoid

It’s always exciting to renovate your house and transform it into your perfect home. However, with homeowners prepared to pay a good amount on renovations, they’re a prime target for many scammers. So, before you agree to anything, check out these nine home renovation scams to avoid.

Door-to-door Contractors

The door-to-door scam starts off very straightforward: a contractor knocks on your door, claiming that they’re doing some work in the area and offering to do some repairs or improvements on your home as well. It may seem like a stroke of luck that a contractor was ‘just in the neighborhood’ at the right time – however, this should be a red flag. Real contractors run tight schedules and they build a client base through marketing and recommendations. Sadly, these types of scams usually target the elderly, who are more trusting, or areas that have recently been hit by a natural disaster.

Leftover Materials From ‘a Job Nearby’

Similar to the door-to-door scam, you may be approached by a contractor claiming that they have leftover materials from a job in the neighborhood and offering to cut you a deal on the materials cost needed for a repair. As above, you’re not dealing with a Good Samaritan. Contractors can return materials such as concrete and asphalt to the supplier. Also, the materials used in such scams are lower quality and may result in a higher cost for you when whatever ‘repairs’ were done need to be properly fixed.

‘Free’ Inspections

Home inspections can cost anywhere between $300 and $500, so always be cautious of anyone offering to perform one for free. This is usually just an excuse for the scammer to get access to your home, where they will ‘conveniently’ discover all sorts of repairs that need to be performed. More often than not, those repairs can easily be done with a bit of DIY, or they might not even be required.

One-time Deals

Everyone fears missing out on a good deal, which is why this is another popular renovation scam. Contractors will present you with an offer that’s almost too good to be true and will add some extra pressure by claiming that it’s a one-time deal you’re only getting today. It’s also not uncommon to be rushed into signing a contract before getting a proper read through, which can result in missing out on clauses you may otherwise not agree to.

‘Attractive’ Financing Options

In this renovation scam, the contractor will present you with what looks like a very attractive financing deal, especially if you claim you don’t have the needed funds for the repair. These deals usually involve low-interest rates or special introductory rates. In such cases, always take the time to read the contract in its entirety, and if there’s any terminology you’re not familiar with, don’t hesitate to ask for the opinion of a lawyer — chances are the contractor will abandon the scam as soon as you mention one.

Upfront Payment

The typical upfront payment charged by trustworthy contractors is usually between 10% and 30%. Anything above that should be a warning for homeowners – especially if a contractor is asking for the full amount to be paid before the job is even started. In the ‘best case’ scenario, the contractor will do a rushed, low-quality job. Worst case scenario, they will do a ‘cash and dash,’ taking the money without performing the services.

Unexpected Expenses

Although going over the budget is not uncommon, always be wary of contractors who use unexpected expenses to claim more money to finish the project. In some scams, contractors can complete a project and then claim that the costs were higher than projected, then threaten you with filing a construction lien if you refuse to pay. A professional contractor should be able to assess the costs of the project and provide you with an exact quote, as well as manage their budget from start to finish.

No Need to Pull a Permit

Not all renovations need a permit, but if you’re planning major structural changes to your home, always make sure that they are in accordance with your local laws. Some contractors will claim that they’ve done similar work in your area that didn’t need a permit, or that the project is on a schedule. In fact, some will offer to perform a job without a permit, which is always a sign that they are unlicensed and you’re dealing with a scam.

Contractor Doesn’t Have a License

Last but not least, always make sure that your contractor has a license. If they don’t, there’s a good chance it has been revoked, and they’re not legally allowed to work on your home. Take a moment to perform background checks if needed, using the Better Business Bureau or the local license board.

 
 

Yard waste suspended for two months in Penticton, and garbage collection to happen earlier

 

Waste collection changes

Penticton residents are reminded that during January and February, yard waste is temporarily suspended due to cold weather.

Garbage and recycling remain on their regular cycle, but during garbage-only weeks, carts will be emptied earlier than normal, so residents should be extra sure to have their bins out by 7 a.m.

Any missed collections can be reported to Waste Connections Canada at 250-490-3888 or email csrpenticton@westernconnections.com.

Residents are asked to ensure the area around carts is free of snow. If your garbage is not collected due to weather, keep the cart in the designated location until the truck can return, and an extra bag can be placed the following week.

Sign up for a free reminder before your date of collection here.

These B.C. communities did not see their property values increase

 

Where values stayed flat

There are few regions in B.C. that did not see a significant rise in residential property values, according to the most recent BC Assessment reports released Jan. 4.

Whereas most regions saw property values increase by roughly 15% to 35%, some of the province’s northern municipalities realized fewer gains. In fact, only the tiny district of Taylor saw a negative gain, at -4% for a detached home property, according to BC Assessment. Meanwhile, Kitimat posted a 0% change over last year for detached homes.

The municipalities or districts of Chetwynd, Dawson Creek, Pouce Coupe, Hudson’s Hope and Fort St. John all saw detached home properties gain by less than 10%.

“Northern B.C. property values for most communities are generally up five to 35% with only a couple of exceptions,” stated northern B.C. deputy assessor Beau Rossel, adding that overall, northern B.C.’s total assessments increased from over $72 billion in 2021 to over $81.7 billion this year.

Meanwhile, Kootenay Columbia’s total assessments increased from about $49.8 billion in 2021 to almost $60.7 billion this year; Thompson Okanagan’s total assessments increased from $159.3 billion in 2021 to $204.2 billion; Vancouver Island’s total assessments increased from roughly $269 billion in 2021 to $343 billion this year; and, finally, the Lower Mainland region, the overall total assessments have increased from about $1.46 trillion in 2021 to about $1.75 trillion.

While property taxes are based on a property’s value, the increases do not necessarily translate into higher taxes.

Each city, town or district will set a new tax rate this year and apply that rate to a home’s value. One’s property tax will only increase above the set rate if the property’s value increased higher than the average change across the same property class for that city, town or district.

Likewise, if a property’s value increased less than others, on average, a lower tax bill will be realized (although the decrease in the relative amount owed may not necessarily offset any potential overall increase set by the new rate, which is predicated on annual city hall expenses).

How Escrow Works When Buying a House

 

When buying a home, you’ll undoubtedly encounter the term “escrow” a few times. And, if you’re a first-time buyer, it might be confusing as there are different types of escrow required when buying the home. So, below, we’ll take a look at the main types of escrow you’ll have to deal with when purchasing a property.

What is an Escrow?

Escrow is when a third party holds onto a particular asset until certain conditions are met. This service protects buyers and sellers, making sure that both sides of the agreement fulfill their obligations.

Buyers Escrow

As a buyer, you’ll be required to pay a deposit that will go into an escrow account. An escrow agent will oversee this account, releasing the funds to go toward paying for the home if everything goes according to plan.

However, if the seller breaks the terms of the contract, the funds can be returned to the buyer. Alternatively, if a buyer decides not to proceed with the purchase and the terms of the contract allow this, their deposit can be returned to them.

Sellers Escrow

Alternatively, if a buyer decides to back out of the deal in a way that isn’t allowed in the contract, the escrow funds can then go to the seller to compensate them for their time and trouble. Therefore, holding the buyer’s funds in escrow encourages them to continue with the deal because their money is at risk.

Escrow Before You Buy

When a seller agrees to the offer made by a buyer, a purchase agreement is signed. Most likely, the buyer will then be expected to make an earnest money deposit fairly quickly, which will go into an escrow account until closing. Often, a title company or real estate agent might act as the escrow agent responsible for managing the funds as agreed upon in the contract. This entails disbursing the funds at the proper time to the proper person, as detailed in the terms of the purchase agreement.

The earnest money could be 1% or 2% of the purchase price and demonstrates that the buyer is serious and committed to buying the property. It can also be used toward the down payment or to cover other costs at closing.

Meanwhile, the purchase contract is likely to contain contingencies that allow buyers and sellers to exit the agreement under certain conditions. For example, if serious faults with the property are found during the home inspection, an inspection contingency could allow a buyer to walk away with their earnest money returned. Conversely, if the buyer fails their mortgage application, a contingency can allow the seller to find a new, qualified buyer.

However, if a buyer decides that they want to break the contract for reasons not covered by contingencies, they’re likely to lose their deposit. But, if a contingency protects the buyer, they should get most of their deposit returned to them.

In any case, having escrow is an integral part of closing on a property in most real estate transactions.

Escrow & Lenders

Another important type of escrow involves your lender, although mortgage escrow doesn’t work in the same way as the escrow involving the seller — it really only exists to protect the mortgage lender.

For instance, when a mortgage lender loans money to a borrower, the home is collateral. Should the borrower default on the loan, the home can be foreclosed, thereby allowing the lender to get their money back. But, if the homeowner fails to pay their property taxes, it can potentially affect the lender. Another potential issue is a fire or another type of damage to the property — which, if uninsured, can affect the investment the lender has made. For these reasons, mortgage lenders require an escrow to pay home insurance and property taxes.

Normally, property taxes and insurance premiums are required to be paid annually, but mortgage escrow allows the borrower to pay these fees gradually each month. The lender sets the amount required based on the previous year’s property taxes for the home, which also allows for easier budgeting for the homeowner. So, instead of having to find a potentially substantial amount of money once a year to cover these taxes and premiums, the borrower doesn’t have to worry about saving to cover these bills.

Finally, there may also be an extra expense on top of the additional monthly payments if taxes and insurance premiums increase. But, this should be less of a concern because most of the fees will have already been covered as part of mortgage payments. A borrower might even get a refund should they pay too much into escrow or if the loan is paid off.

What Happens with Escrow at Closing?

Typically, if everything has gone according to plan, escrow funds will be put toward a down payment and other expenses at closing. However, in some situations, all or some of the earnest money could be returned to the buyer. This can occur if the buyer doesn’t need to make a down payment, such as through a VA or USDA loan. Or, sometimes, the seller might agree to cover some of the closing costs, in which case the buyer would get some of their deposit back.

If a buyer is required to pay mortgage escrow, they’ll need to make the initial payments at closing, which could be at least two months’ worth of insurance and taxes to create a reserve.

Escrow Accounts

Note that funds placed in escrow have to be kept separate from other money. In fact, by law, escrow money must be placed in a separate account by the agent. A separate account is also important with mortgage escrow because it makes it easier to separate mortgage and interest payments from the money you’re paying toward taxes and insurance. And, while there isn’t a legal requirement to place earnest money in an escrow account, it is a generally accepted norm.

As far as the escrow agent, this is usually up to the buyer. The buyer’s real estate agent will likely be able to recommend a reputable agent, and the deposit should never be given directly to the seller. While mortgage escrow isn’t always required by lenders, the terms of the loan could be better when it is required. As an example, if you have a 20% down payment, you might be able to avoid mortgage escrow, but the lender could require other fees to be paid.

As you can see, escrow funds can serve multiple purposes in a real estate transaction. Whether you’re buying or selling a house, it’s essential to have at least a basic understanding of how escrow works.