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.

 

6 Designer Tips for the Perfect Gallery Wall

 
Gallery wall

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Gallery walls are one of those classic design features that never really go out of style. But as great as they are, they can also be a bit tricky to pull off successfully. If you’ve ever tried to create a gallery wall and couldn’t get it quite right, you’re not alone.

We’re here to let you in on a little secret, just like the perfect coffee table vignette, there’s a formula for the perfect gallery wall. Here are six designer tips to help you create a great-looking gallery wall every time.

Pick Your Palette

Like anything else, a gallery wall needs a cohesive color palette to look – well, cohesive. If you’re going for an eclectic look, you can be a little less strict with the color palette. But if you want your wall to have that curated feel, chose one main color to pull all the pieces together. Then try to keep secondary colors similar in tone and vibrancy.

Consider Your Gallery Wall Style

Another trick to creating a pulled-together look for your gallery wall is to stick to one style with the pieces you choose. For example, a modern poster might look a little jarring paired with a collection of vintage prints.

And don’t forget to consider the style of your home and decor. A gallery wall is an excellent opportunity to enhance your style, but it should complement your decor, not compete with it.

Gallery wall idea

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This Ship Needs an Anchor

Consider your gallery wall the way you would a room. It needs a focal point to give the eye somewhere to start when looking at the collection. Choose a large piece to act as the anchor and ground your whole display.

But try to avoid placing your anchor piece right in the center of your gallery wall. Keeping the largest piece off-center helps the eye move around the gallery wall, rather than stopping right in the middle.

Mix Up Your Media

Unless you’re going for a totally uniform look, it’s OK to get creative with the different pieces you include in a gallery wall. Not everything has to be framed art or photographs. Add interest by mixing in personal touches, sculptural objects, natural elements and even everyday items.

As long as you can hang it on the wall and it fits with your theme and color scheme, the possibilities are endless. Bring your gallery wall to life with wall planters or add dried florals for a more romantic feel. Maybe you have travel souvenirs like postcards and wall hangings you can combine with your collection of vacation photos. And don’t forget those everyday items you have to hang on the wall anyway. Include clocks and wall sconces in your gallery wall layout, so they look like part of the plan.

To Match, or Not to Match

There are two types of gallery walls: the less-formal style with different frames and the orderly, symmetrical type with matching frames. Both are perfectly acceptable depending on your style and what you want to display.

A symmetrical layout with matching frames is a great way to create a big impact when displaying personal photos. Choose one size and style of frame, print all your photos the same size and hang them in a grid pattern to create a stunning photo wall.

But you can also collect pieces that speak to you and go with a couple of different frame styles. When mixing frames, you still want to ensure you have a palette or common element to keep your gallery wall looking cohesive.

Gallery wall concept

Image: Photographee.eu / Shutterstock.com

Plan Before You Hang

Here’s where things get tricky. Once you’ve gathered all the perfect pieces, it’s time to plan the layout of your gallery wall. Save yourself hours of filling holes and never hang without a plan.

The easiest way to plan out your gallery wall is to mock it up on the floor. Start by measuring the wall space where you want to hang your gallery. Then get the painter’s tape and tape off a box that size on the floor. Now lay out all your pieces within the box until everything looks just right. Stand on a chair and take a photo of the layout and then transfer it to the wall.

If you’ve been holding off on a gallery wall because you weren’t sure how to pull all the elements together, try these six designer tips to get the perfect gallery wall every time. 

 
 

Cash Deposits When Buying a Home: What to Know

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Cash offers have traditionally been a great way to get a discount or encourage a reluctant seller. However, when it comes to mortgages, cash can suddenly lose its appeal. Nowadays, lenders want to know exactly where all your funds are coming from.For instance, using undocumented cash funds could create unexpected issues in a real estate transaction. Specifically, if you’re hoping to use cash that was deposited into your bank account to contribute to the down payment, you might want to reconsider. That’s because using cash for home deposits could look like fraud and affect your chances of getting a mortgage.

So, while cash may be king with home sellers and their real estate agents, the same is not true with financial institutions. Therefore, when purchasing a home — especially for the first time — buyers should have a strong grasp of how lenders treat deposits.

Let’s take a look at the considerations surrounding cash earnest money deposits when buying a property.

Verifying Cash Deposits

You can get cash from anywhere and deposit it into your account. But, when purchasing a home, you will have to prove that you received the cash through legal sources.

In particular, the lender needs to confirm that the money was obtained through legal means and that it isn’t a loan. Accordingly, they will verify any money you have on hand (in addition to your income). If they are unsure of the source of a deposit, it could look fraudulent. For example, unverified deposits may cause the lender to suspect that you are using borrowed money to make your application more successful; making misleading statements about your employment; or borrowing money from the seller to make the down payment.

However, fraud isn’t the only issue that lenders are looking to stop. They are also concerned with money laundering, the funding of illegal groups that may be related to terrorism and any other illegal acts. If the lender suspects any problems like this, they are required to report it to the appropriate government agency.

Qualifying for a Mortgage

When you apply for a mortgage, the loan officer will review your income and compare it to your monthly expenses, which is your debt-to-income ratio — the lower the ratio, the better.

Typically, to be eligible for a mortgage, your debt-to-income ratio must be 43% or less. And, any cash deposits that are actually loans will add to your debt, thereby increasing your ratio. Plus, you may be liable for fraud if you neglect to claim that a cash deposit is from a loan. Some lenders may not even allow you to have any other loans when you apply.

Proving the Source of Your Cash

Unfortunately, it can be difficult to prove where cash deposits came from. Undoubtedly, you will need to provide your lender with paperwork that proves the source of the deposit. Exact requirements will vary by lender, but may include:

  • Pay stubs from your employer
  • A gift letter signed by all parties, including the donor and receiver
  • A detailed report of any sale in which you made a profit
  • A signed, dated copy of any loan you provided and proof that you lent the money
  • A letter of explanation from a licensed attorney

Gifts Toward the Down Payment

Down-payment gifts are actually allowed by most lenders — you may just have to prove that it is a gift and not a debt that you would need to repay. To prove that a gift is genuine, provide your lender with solid evidence, such as a letter from the person who gave the gift, as well as proof of the transfer of funds, like a deposit slip or transfer receipt.

Gifts that come from family members are usually fine. But, if the person has a significant interest in the property, it could violate the law. As such, it is essential to note here that any seller, builder, developer, real estate agent or anyone else with a clear interest in the mortgage is not allowed to gift funds to the buyer.

Simplified Cash Deposits

Fortunately, lenders only review the last 60 days of transactions in your account, so deposits prior to that time do not need to be accounted for. Although this money still needs to be acquired legally, lenders will not request evidence of the source for deposits made more than 60 days ago.

However, deposits of $10,000 or more will have to be reported to the IRS whenever they take place. You can’t get around this by splitting up deposits into smaller amounts, either — they will still be reported.

Consequently, if you do need to make a deposit in the 60-day window, inform the lender and ask for their advice on the requirements. Then, be sure to keep any accompanying documentation of the cash deposit so that you will have it if or when they ask for it. Likewise, if the source of the cash will be difficult to prove, you may be better off not depositing the money. And, if you are unsure of the situation with the money you are hoping to deposit, check with your lender before putting it into your account.

Cash transactions could hinder the buying process. So, if you can’t avoid them, contact your lender or mortgage broker to ensure that you stay within their requirements so as not to compromise the mortgage.

Although utilizing cash deposits when buying a home is not forbidden, they may present some challenges if you are unprepared for them. Therefore, it’s essential to understand the importance of always having documentation of the source of the funds when using cash.

8 Things Careful Home Buyers Always Pay Attention To

At-Home SPA: How to Have a Pampering Day While Staying In

 

If, like many of us, you’re feeling a bit overwhelmed with all that’s going on right now, you could probably use a day at the spa. After forgoing many of our normal luxuries for months, let’s face it – we’re all ready for a little pampering.

But, if a trip to the spa isn’t in the cards right now, don’t let that stop you from getting the self-care you deserve. With a bit of planning and preparation, you can have a lovely and luxurious spa day at home. Get ready for a little quality “me time” with these six tips for a perfect day of relaxation while staying in.

Comfort is Key

The number one goal at the spa is to make guests feel as comfortable and relaxed as possible. So don’t neglect this critical step when planning your at-home spa day. Start by wrapping yourself in a super soft or silky robe and don some plush slippers. Then get your fluffiest towels ready for after your treatments. And don’t forget to turn up the thermostat a little, so you’re warm and cozy all day long. You should never have a chill at the spa!

Remove Distractions

Almost any spa you visit has a strict no cellphone rule. Make your day as relaxing as possible by turning off your phone or, at the very least silencing notifications. This day is all about you, so you won’t need to know what’s going on in the outside world.

Set the Mood

What does the spa have that you probably don’t get very often at home? The perfect relaxing ambiance. To recreate the mood, indulge your senses with a collection of spa staples.

Scent has the power to calm us and trigger positive memories. Try lighting a candle or using a diffuser with your favorite calming scent to help you unwind. You can also use a few drops of your favorite massage oil on pressure points to carry the soothing scent with you.

Lighting and music also play an essential role in creating a relaxing environment. Dim the lights or light candles to get a soft, warm light that will help you relax. Then drown out exterior sounds such as traffic or lawn equipment with white noise or peaceful music. Choose calming nature sounds such as soft rain or ocean waves for a soothing, distraction-free atmosphere.

Get in the Zone

To get the full spa day experience, you need to think a little bigger than just a facial and warm bath. Make the most of your “me day” by setting up zones in different areas of your house for different treatments.

For example, you could create a mud zone in the bathroom and a massage area in the bedroom. If you have a bit of outdoor space, create a spot outside for breaks. Set out a blanket and pillows and a few of your favorite snacks for sustenance over the course of the day.

Customize Your Day

Take the time to customize your perfect day – after all, you’re the one making the schedule. If you’re an early bird, start with a sunrise meditation session. But if you’re a night owl, go ahead and sleep in and plan for a candlelit soak at the end of the day. Or maybe you’re not a bath fan. Then skip the long soak in favor of a facial while you read in your favorite spot.

Start at the Bottom

To give yourself the full-body treatment, start at the bottom and work your way up. Your feet carry a lot of weight every day and they deserve a little pampering too. Try soaking them in warm water and Epsom salts to relieve those aches and pains. Then use your favorite oil or skin care treatment to help replenish dry skin.

Next, be sure to pamper your entire outer layer with scented scrubs and moisturizers. Once that’s done, treat your face with a mask, depending on your skin type and seasonal needs. Lastly, top it all off with some love for your locks. Choose a hair mask, oil or cream and slather your strands for some quick hair repair.

After all that’s happened this year, we could all benefit from a calm, soothing environment and a little self-care that makes us feel good from head to toe. Use these tips to treat yourself to the perfect spa day at home.

What First-Time Homebuyers Should Know about Home Insurance

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Real estate transactions are tricky and it’s all too easy to get overwhelmed with the sheer amount of things you need to take care of. However, there are some things you absolutely shouldn’t forget. Home insurance is one of them, and the more you know, the better able you are to save money and protect your assets. 

Who Needs Home Insurance?

Anyone who is buying a home would be wise to consider home insurance, but most people won’t have a choice in the matter. If you’re taking out a mortgage to cover the cost of your new home, your lender will require you to take out a home insurance policy. Essentially, they want to know that their investment, i.e. your new home, is protected in case of disaster.

While homeowners who manage to buy their home without taking out a mortgage aren’t required to take out an insurance policy, they are advised to. You never know when accidents might happen or if disaster will strike, so it’s worth being prepared for any eventuality. Which leads us on to our next point.

What Does Home Insurance Cover?

A standard home insurance policy typically doesn’t cover as many things as homeowners expect it will. As such, always do your research and know exactly what you’re covered for. In general, a standard homeowners insurance policy will cover you for the following:

  • Damage to the interior and exterior of your home caused by disasters such as fire and adverse weather (hail, lightning, etc.).
  • Damage to personal belongings, and detached structures such as garages, fences, and sheds caused by disasters such as fire and adverse weather (hurricane, hail, lightning, etc.).
  • Theft of personal belongings.
  • Damage caused by criminal acts.
  • Accidental damage, such as water damage from burst pipes.
  • Liability protection.
  • Additional living expenses (ALE), in case you need to abandon your home for any period of time.

What Isn’t Normally Covered by Homeowners Insurance?

There are several things a standard policy won’t cover, however. Flood insurance, for example, normally needs to be purchased separately and is seldom included in a standard policy. Interestingly, while internal water damage is typically covered, any form of external water damage normally isn’t, not just natural floods. As an example, a broken sprinkler may damage the inside of your home, but it normally won’t be covered.

Sewage problems are also not normally covered, and a ‘Sewage Backup Coverage’ typically needs to be purchased separately. Wear and tear and anything that can be prevented through reasonable home maintenance, such as leaking roofs, pest infestations, and mold, are also not typically covered.

Depending on your location, things like snow and ice damage coverage may or may not be included. Earthquakes or hurricane prone areas also might require a separate policy to cover these natural disasters. ‘Acts of God’ are also not typically covered, and definitions are generally rather vague.

How Does Homeowners Insurance Work?

Each home insurance policy is different and homeowners are able to customize it to best suit their needs. Most insurance companies offer three levels of coverage, with the cheapest offering the least coverage.

Actual Cash Value

This policy covers the cost of your home plus the cost of your possessions. Depreciation is deducted, so that you’re covered for what they’re worth now, not the price you originally paid for them. It’s the cheapest option, but also returns the least in case of a claim.

Replacement Cost

This policy covers the cost of your home plus the cost of your possessions without deducting depreciation, up to a pre-set limit. As such, you’d be able to repair or replace your home and belongings up to the value you originally paid.

Guaranteed Replacement Cost

Also known as extended replacement cost, this is the most comprehensive coverage and the most recommended. With this policy, you’re covered for whatever it costs to repair or rebuild your home and replace your possessions, even if it exceeds your policy limit. As inflation and the value of goods increase over time, it’s best to cover yourself for more than your home and possessions were worth when you bought them. With this policy, you can do just that.

How Much Does Homeowners Insurance Cost?

It’s difficult to put a price on homeowners insurance, as each policy will differ depending on a huge number of variables. However, the average policy across the U.S. costs just under $1,000 per year. First-time buyers may pay more, as they typically don’t immediately qualify for discounts and benefits, and some policies can exceed $2,000 per year.