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What Is Escrow?

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When it comes mortgages are concerned, “escrow” and “escrow accounts” refer to two slightly different concepts. Escrow is the process by which a neutral third party mediates a real estate deal, holding money and property “in escrow” until the two sides agree that all the conditions are met for a sale to close. By contrast, an escrow account is usually an account that helps to manage a mortgage borrower’s annual tax and insurance costs.

What Does Escrow Mean?

Escrow refers to a third-party service that’s usually mandatory in a home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects what is known as “earnest money” from the buyer: a deposit that is equal to a small percentage of the sale price. In exchange, the seller takes the property off the market. Until the final exchange is completed, both the buyer’s deposit and the seller’s property are said to be in escrow.

Escrow “accounts” have more to do with your monthly mortgage payment than the initial home purchase. When you borrow money from a bank or a direct mortgage lender, you’ll usually be given an escrow account. This account is where the lender will deposit the part of your monthly mortgage payment that covers taxes and insurance premiums. By collecting a fraction of those annual costs each month, the escrow account reduces the risk that you’ll fall behind on your obligations to the government or your insurance provider.

How Do Escrow Accounts Work?

When you obtain a mortgage loan from a bank or direct lender, you also receive an escrow account that helps you pay your property taxes and homeowner’s insurance premiums on time. Even though these costs are paid on an annual basis, your lender will require you to pay a monthly fraction towards each cost and accumulate the balance in your escrow account. This ensures that these expenses get paid on time every year.

Mortgage lenders require borrower escrow accounts in order to minimize the risk that you fall short of your financial obligations as a homeowner. In a foreclosure, unpaid taxes or insurance can result in liens that make it harder for the mortgage lender to recover the original loan. This creates a strong incentive for lenders to keep their borrowers on track with escrow accounts that smooth out the non-mortgage costs of owning a home.

Although escrow accounts conveniently allow lenders to pay the relevant taxes and insurance premiums on your behalf, they do have some drawbacks for the borrower. Lenders often require you to a keep a minimum balance in your escrow account to protect against any unexpected cost increases. The usual rule requires a minimum of two months’ expenses on your mortgage escrow account, though the limit can be higher on riskier mortgages. Lenders usually review your escrow account once a year to make sure that the calculated payments are keeping up with costs.

How Much Do Escrow Fees Cost?

Just like any other service provider involved in a real estate deal, the escrow agent will need to be paid a fee. Escrow services for a home purchase typically cost 1% to 2% of the final price. Based on national median home values, this translates to a fee of $2,000 to $4,000, which is added into your other closing costs. However, escrow fees are one of the many expenses that are negotiable between the buyer and seller. This means that you can try asking the other party to foot part or even all of the escrow fee, depending on local rules or the current market conditions.

If you’re buying, you’ll also need to deposit between 1% to 3% of the final sale price in a joint escrow account with the intended seller. This earnest money serves as proof that you’re serious about following through with the sale, and it obligates the seller to take the property off the market while the transaction gets finalized. When you complete the transaction, the earnest money you put into escrow will be applied towards your down payment on the house. Earnest money in escrow isn’t a fee, but you should be wary of the fact that it’s possible to forfeit that money if you can’t come to a final agreement with the seller.

When is Escrow Needed in a Mortgage?

Escrow plays a role in both your initial home purchase and the ongoing monthly mortgage payments that follow. In a purchase, the escrow process provides certain guarantees to both the buyer and the seller. Once the two parties agree on a sale, a neutral third party—a bank, title company or attorney—will receive the signed purchase agreement so that it act as the escrow agent. Escrow agents exist to monitor and help fulfill the conditions of the sale, such as the buyer’s “earnest money” deposit for a percentage of the sale price.

TYPICAL COMPONENTS OF ESCROW IN REAL ESTATE

Buyer Must Provide…

  • earnest money towards down payment
  • proof of mortgage loan approval

Seller Must Provide…

  • access to property for inspections
  • required repairs or renovations
  • inspection of title

Once a property is “in escrow”, neither the buyer nor the seller will receive anything from the escrow company until all the conditions of the purchase agreement are met. For example, you might agree to purchase an older home on the condition that the building pass a safety inspection. Other common escrow conditions include repairs and property tax audits. Meanwhile, the buyer’s earnest money proves to the seller that the buyer has both the intent and the ability to complete the purchase. Earnest money can be forfeited to the seller if the buyer backs out or fails to hold up the terms of the contract.

Escrow agents are also responsible for distributing money to parties other than the buyer and seller. These can include commissions to the real estate agent, prepaid mortgage interest to the lender, recording fees to the county office of records and the escrow agent’s own fee. In this sense, escrow greatly simplifies the homebuying experience: without it, you’d be held responsible for sending timely and accurate payments to each and every party involved in the transaction.

Questions To Ask When Buying New Construction

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Buying new construction is a different process than buying your typical pre-built home. What’s included, what’s not, and what’s hidden in that massive contract depends on the builder that you use. As with any situation where you’re moving or about to spend a lot of hard earned money, it’s important to go in prepared – and that means asking the right questions.

The first interaction you’ll have with the builder – and in fact, the first several, at least – will be with the builder’s sales representative. These early meetings are your chance to ask all of the questions you might have regarding costs, labor, and other essentials that you need to know about before jumping in. Write your questions down before you go in so that you can be sure not to forget anything important, and don’t be shy about getting the answers that you need. This is a major purchase, and you don’t want any surprises later.

Not sure exactly what you need to be asking about? These 10 questions to ask when buying a new construction home will help get you started.

Is the lot cost included?
When you’re exploring new construction options, you’ll see that each plan comes with a base cost. This is the cost of the structure itself, as well as base interior and exterior features (we’ll get into those in a little bit). What may not be included is the cost of the land, so be sure to ask if the lot cost is figured into the base.
If the lot cost is included, ask if there are premium costs for certain lots. It’s possible that the base cost does include the lot, but the remaining lots in the development all have added costs for certain features that you can’t opt out of, such as look-out windows in the basement or wider yards. If the lot cost is not included, ask what it is (and whether there are additional premium costs) and factor those into the base price for the house.

How long will building take?
It’s important to know what you’re getting into timing-wise with a new construction build, particularly if you have a house to sell first or you’re going to be renting. While the building process is prone to delays and you won’t be able to get a finite schedule for how long the build will take, you’ll be able to get a general idea of what you can expect. Be sure to also ask if the build time includes the time it takes to get the permits, since those will typically take about 30-45 days to obtain.

What warranties are provided with the house?
Just because a home is brand new doesn’t mean that no problems will arise. Fortunately, most new construction homes come with one or more warranties that protect you in the event of a mishap early on, including a short term whole-house warranty and a longer structural warranty. Ask what the warranties include and how long they last. While you can always buy your own home warranty, you should expect that the builder will cover you in some way for at least the first several years.

What are the standard finishes?
Does a base cost look too good to be true? That might be because the builder is expecting you to spend big when it comes to finishes like flooring and countertops. Ask what types of finishes are included, and better yet, go through the model unit with the sales representative and have them point out what’s standard and what is an upgrade. You likely won’t meet with the design center until after you’ve gone under contract, so it’s important to figure out early what sorts of finishes and appliances you can expect to be included in the home’s base price.

Are you allowed to purchase your own appliances or materials?
Had your heart set on butcher block countertops but the builder doesn’t offer them? It’s possible that you may be able to purchase them yourself and then have the builder install them. Alternately, some builders won’t let you purchase your own materials, but they will let you bring in your own appliances, even on items that are included in the sale, like sinks and toilets. Keep in mind that, in terms of appliances, you probably will have to make some purchases on your own, such as washers, dryers, and refrigerators.

If you can bring in your own materials or appliances, will you get credits?
Let’s say the base price of your new construction home includes a kitchen sink worth $200, but you’d like to upgrade and purchase a sink on your own that costs $400. Will you get $200 off the purchase price for not using the sink that’s included in the base? Some builders offer credits for any upgrades or self-purchased materials or appliances, while with others you’ll just have to eat the cost of the originally included item. Credits are a nice touch, but they’re not usually standard, so it’s best not to go in expecting that you’ll get money off the base cost for purchases like these. In general, builders don’t like to lower the base cost, but if they do offer credits, that’s a win for you.

Is landscaping included?
Depending on the size of your yard, landscaping, including sodding and putting in trees and plants, can set you back several thousand dollars or more. Is that a cost you’ll have to factor in on top of the home purchase? Some builders include your basic yard work, while others leave you with unfinished land that becomes your responsibility to landscape (and generally must be completed in a set amount of time, per the contract). Ask whether landscaping is included, and if so, what that entails and if there is any sort of warranty on the materials so that if your newly sodded grass dies right away or some other mishap occurs you’re not responsible for fixing it.

Does the contract include a cost escalation clause?
New builds are notorious for last minute surprises, but you don’t want to be on the hook financially if it happens. A cost escalation clause allows the builder to charge you for any unanticipated costs that arise as a result of necessary labor or materials. So if lumber prices go up before the builder has purchased the materials for your flooring, or an unexpected delay adds a few weeks onto the build, you’re on the line for those costs. If you’d rather not deal with the stress of unanticipated costs, find a builder that doesn’t include a cost escalation clause in the contract.

Are there any homeowners rules or regulations?
Even if there is no homeowners association for the development, the builder may still set some guidelines as far as what’s allowed and what’s not on your property. For example, you may not be able to use a particular type of fencing or install a shed in your backyard. It’s better to ask this question early and know what to expect than to move in and find out that you can’t bring into fruition certain plans you had for the space.

Are there any financial incentives for using the builder’s preferred lender?
Some builders offer discounts on closing costs if you obtain your mortgage through a company that they have a relationship with. Ask if these sorts of financial incentives are offered, but don’t make your final decision about where to get your mortgage based on the discounts alone – you may still be able to find a better deal through other lenders. It’s still good to know however if there are benefits to working with the builder’s preferred mortgage company.

If it’s your dream to build a new construction house, go in to the process with an open mind and a clear idea of what you can expect. The more questions you can ask in the beginning, the less surprises you’ll potentially face in the future.

And as with any home purchase, be sure to have an attorney read over your contract so that you can be sure everything is fair and equitable. Some buyers of new construction prefer to go in to sales meetings with a real estate agent as well, though in my own experience, I didn’t find that to be necessary. Be smart, ask the right questions, and at the end of the day (or fine, year) you’ll end up with a beautiful home built just for you.

Should You Rent Out Your House?

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Should you rent your house out? Every day, millions of landlords rent out houses to good tenants. With proper planning and preparation, you can minimize the hassles and turn your home into a profitable venture. If you think any of these points apply to you, you may want to consider renting out your home.

  • Your primary home, while a necessity in life, is not typically an asset or investment. An asset makes you money. A liability costs you money. By renting out your home, you transform a liability into an asset.
  • You can hold onto your property while rental income pays down your mortgage. Over time, rental property values (hopefully) will climb and build your wealth. If you can rent out your house for more than your monthly expenses, you will also experience additional monthly cash flow. That’s the goal for all potential landlords—and what we at BiggerPockets want to help you achieve.
  • Start your investment career with no additional costs. Renting your property could be the first step in a tried-and-true method for building wealth. Many real estate investors start this way—renting out their homes as they upgrade to bigger or better houses. This may also help fund your retirement, as you may end up owning multiple properties “free and clear” by the time you are ready to retire, providing monthly rental income or a lump sum if you sell.
  • Retain the possibility of returning to that home. This is especially helpful if you’ve been forced to move quickly because of a temporary job relocation.

If you need help finding a new home to buy while you rent out your current one, I’d be happy to help – give me a call today!

Potential Neighborhood With An HOA? Here’s What You Should Know

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Let’s say you have your heart set on buying a home in a community with a swimming pool, a clubhouse, and maybe even a playground or trails. Having access to these amenities often means living in a community with a homeowners association, or HOA.

Generally, an HOA is responsible for keeping the neighborhood looking beautiful — and as a result, keeping property values high. But since no two neighborhoods are the same, no two HOAs will be the same, either.

What You Should Know About the Homeowners Association

Doing your research on homes and communities means finding the answers to dozens of questions. As a savvy home buyer, you’ve probably already considered some of the most important topics early on in your home search, such as the local property taxes and whether the neighborhood is appreciating in value.

But if you’re considering a neighborhood with an HOA, there are a few additional things that you should know about the community and the association before you buy a home. Here are the essential questions you should ask.

1. What Does the Homeowners Association Do?

Each community varies, but in general, a homeowners association assists residents with property maintenance (by providing services like lawn care, trash removal, or Internet), regularly beautifies the neighborhood common areas, and upkeeps any shared amenities. In return for these services, residents pay an association fee, which we’ll talk about later.

Since the HOA is also concerned with keeping property values high, the homeowners association may also dictate what residents can and can’t do with their properties. These rules keep residents from worrying about a neighbor painting their house a funky color or letting their lawn go wild.

2. Are You Required to Join the HOA?

Before you decide to buy a home in an HOA neighborhood, first check to see whether the community has a voluntary or mandatory HOA. A voluntary HOA doesn’t require that you join the association or pay dues, but a mandatory HOA does.

3. How Much Are the HOA Fees?

As we mentioned before, HOA fees cover the services that the association provides. HOA fee costs (and the frequency with which they’re paid) can vary from community to community, so ask your real estate agent about how much the fees are before you buy a home in the neighborhood.

4. What Are the HOA’s Expectations for Residents?

Typically, a homeowners association will have a list of rules and regulations that residents are expected to follow when they live in the community. (These are known as Covenants, Conditions, and Restrictions, or CC&Rs.)

These regulations can dictate everything from what colors you can use to paint your home to how many vehicles you can park in the driveway. Again, each homeowners association varies, so it’s best to read the Bylaws of communities you’re considering to learn what’s expected of residents.

5. When (And How Often) Does the HOA Meet?

If you’re interested in joining your neighborhood’s HOA to get involved in your community, you might also want to consider when the association meets. The HOA may meet annually, bimonthly, or monthly, depending on the association’s size, so check to see if the regular meetings will fit within your schedule.

6. Does the HOA Host Any Activities?

Finally, when considering a neighborhood with an HOA, you should learn whether the HOA provides other ways for you to get involved and meet your neighbors. Ask your real estate agent about whether the neighborhood association hosts annual block parties, pool parties, holiday celebrations, Yard of the Month competitions, or any other neighborhood activities.

How To Make Your Offer Stand Out

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In today’s market,  it’s not uncommon to be in competition with several other buyers for your dream home.  When you find that perfect house, with the chic chandelier and the doggy door for Fido,  the last thing you want to do is lose it because your offer didn’t stand out to the seller, Taking the time to put forth a well-written offer can work wonders for a buyer. Each seller and agent may have different opinions on what makes the best offer, but here are some that we’ve found are the most consistent:

1. Include a pre-approval.

If you want to show the seller that you’re serious about buying a home,  get pre-approved before you ever sign an offer.   Not only does it show that you didn’t just waltz up, see the for sale sign and throw something out there, but it also alleviates some of the seller’s worries that you’ll back out when the bank finds out your credit isn’t actually as good as you thought it was.  Be sure to include that pre-approval letter from the bank with the signed offer.

2.  Make a decent earnest money deposit.

When you’re sure you can’t picture yourself without this house,  be ready to boost your earnest money deposit. Earnest money shows the seller that you’re putting your money where your mouth is, and you’re prepared to give up that chunk of cash if you back of the contract for any reason other than those allowed under the contract terms.  There is usually a typical amount offered for your area, so if you really want to look good, go above and beyond that amount.

3.  Remove all the contingencies you can.

Having two mortgages while trying to sell the home you’re in now isn’t really a dream that anyone has, but if you have the cash to do it, it’s definitely going to make your offer more desirable.  Anytime you can waive contingencies in the contract, like the sale of your current home,  it gives the seller more confidence that the deal will go through without a hitch.  Another option would be to shorten the typical time periods.  If it’s customary for your inspection period to be 15 days, shorten it to 10 to let the seller know you’re looking to make this happen quickly.

4.  Make it Your Best

When you’re up against multiple offers,  don’t waste a lot of time expecting to negotiate.  Base your offer on solid research of surrounding comparables and really offer what you’d be willing to pay.  If you don’t,  your offer may be tossed aside for others that did. This includes more than the price, too.  Maybe pay out of pocket for some of those extras, like a home warranty or closing costs, instead of asking the seller to contribute.

5. Get Personal

It’s time to let the seller know why you’re dying to buy their house, and be honest.  Is it because you want to raise your family in the neighborhood?  Do you see Fido rolling around in the big, fenced backyard?  Connecting with the seller and creating a sense of relatability can go a long way, but avoid sounding desperate.  The idea is to keep it short, simple, and honest, and don’t forget to have your buyer’s agent proofread it. Don’t hesitate to go out of the box to make your offer standout to the seller. It may end up getting you your dream home.

Stop Waiting – Organize That Garage!

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Stop Waiting - Organize That Garage!

If you are feeling a little overwhelmed every time you look into your garage because it has become a dumping ground for items that don’t have another home, it is time to start clearing and organizing to make the best use of your space. This can be a simple task if you go in with a plan and create organized storage space. You can transform that garage, and here is how.

First thing? Throw out or donate what isn’t used. After you’ve done that, sort what remains into groups. Items used together should be stored together. Using clear containers with lids to do so will make your items visible and help to encourage you to only keep what you need and use.

Once everything is grouped and stored, you will want to consider positioning. What items do you use most? You will want to make sure those are the most easily accessible. Put rarely used or seasonal items in the harder-to-reach spots.

The main focus of keeping a clean, organized garage is getting things off the floor. Capitalize on your wall space! This will help you fit more while keeping it all visible and easy to access. There are many types of wall storage, and many homeowners opt for one or a combination of the most popular choices to include pegboards, open shelving, closed cabinets, and panelized systems. For your most infrequently used items, the ceiling can provide an ideal storage space, but keep in mind that ceiling storage must be placed so that it doesn’t interfere with the garage door.

Now is the best time to get your garage in order. Take advantage of the cooling temperatures and get to work!

Boost The Mood Of Your Space

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Boost The Mood Of Your Space

If you’re still working from home, you may be feeling down about your current space. While working from home can be fun, it is important to make sure your space keeps you motivated. The best way to do that is to change up your style! Here are some of the easiest ways to boost the mood of your space:

Compartmentalize

If you’re working at home, it is easy to get distracted by your typical home responsibilities since they are now right in front of your face. To stay focused on work, try designating different areas for certain activities. By assigning specific areas for fitness, work and leisure, you will have an easier time letting your brain and body know what you should be focusing on.

Try Some Color

Adding an accent wall, or even painting a whole room, is one of the easiest ways to immediately boost the mood of a room. Consider adding a feature wall with a pop of color or lighting up the space where you work during the day. If you’re not ready to commit to painting your walls you can use accessories like throw pillows, curtains, or artwork to bring color into your space.

Declutter!

Spending more time at home can make a space that didn’t seem cramped before feel overwhelming. There’s no better way to bring harmony to your space than decluttering. While having a clean, decluttered space is aesthetically pleasing, it can also reduce your stress and help you stay focused on work instead of worrying about all the clutter in your field of vision during the day.

Try a Digital Detox

Staying informed is important, and many jobs require technology, but cutting down on screen time can greatly impact how you feel in your space. To reduce screen dependence, set up manageable boundaries based on time or place. Designate phone-free times or remove tech devices from your bedroom for a daily reset.

Lighten Up

If your home is now your office, you can now control the light conditions of your workday. Natural light is one of the best ways to literally and figuratively lighten up a space. Try positioning your desk near a window and keep drapes and shades open during the daytime. You can also add reflective surfaces to enhance the light in dark rooms.

Why did my credit score drop?

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Why Did My Credit Score Drop?

If you’ve seen a change in your credit score recently, you may be wondering why. There are a number of factors that contribute to a dropping credit score and it is important to know what may be causing that! When buying a home, it is important to maintain your credit and not make any major purchases that could impact your score. Here are the top 5 reasons for a drop in credit:

YOU MADE A LATE PAYMENT

Accounting for about 30% of your total rating, your payment history has a big impact on your credit score. If you make a loan or credit card payment more than a month after the due date, it could cause your credit score to drop. A payment 60-90+ days late will have an even greater impact on your score.

YOU MADE A LARGE PURCHASE

Your credit utilization ratio can largely impact your credit score. Your ratio is how much of your credit you use in relation to your total available credit. The goal is to have a lower ratio so if you’ve been using more of your available credit lately, you may see a drop in your score. If for any reason your credit limit is lowered, it can impact your credit utilization ratio and impact your score.

AN ACCOUNT GOES TO COLLECTION

Timely payments on all accounts is an important part of your credit journey. Late payments on credit cards, loans, to medical facilities, student loans and utilities can be sent to a collection agency, which could in turn show up in your credit report.

YOU OPENED A NEW LINE OF CREDIT

When you apply for new credit, you are giving lenders the permission to access a copy of your credit report, which is known as a hard inquiry on your credit. If your credit report indicates that you’ve applied for multiple new credit lines in a short period of time, your credit score may be impacted.

YOU CLOSED A CREDIT LINE

Closing a card means losing available credit, which could increase your credit utilization ratio. As a result, your credit score may drop. If closing a card helps you stop spending, it may be a good idea. Otherwise, it is usually wise to keep lines of credit open. The length of time you’ve had accounts open shows that you have a solid payment history, so that could be another reason to keep that card you’ve had awhile open if you are using it wisely!

Use Your COVID Downtime to Make a New Home Wish List

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Maybe you haven’t started looking yet, or you found a home you love but COVID is postponing the move. Either way, you can use this time of waiting to create a plan or wish list for what you want to find or the changes you want to make. The best way to start this list is to use your current space to decide what you wouldn’t want in a new home.

Start with what works and what doesn’t. Make a list of what you love about your current place, and what you don’t. What room is your favorite? What makes it your favorite? Take the time to think about what features make that room favorable. How about the structure? If you currently have low ceilings, decide if you want higher ceilings in your next space. Go through each feature you dislike and try to figure out how your new home can be better.

Take time to ask yourself how you feel when you are home. Do you need more space? Maybe you have too much space now and realize you have too much clutter because of that. Does your current layout suit your style and needs? Maybe an open floor plan would work better than what you have now – make sure you note that. Decide if your current number of bathrooms and bedrooms suits your needs, or will suit your needs in the future.

Next, consider your outdoor space and neighborhood. Do you find yourself spending all your time indoors because you don’t have an outdoor space you love? Do you wish you were closer to a park? If you constantly feel stuck inside, you should decide if that is impacted by your yearning to spend time inside because you enjoy that space or because you can’t enjoy your space outside.

Once you’ve completed your list, reach out to your local real estate agent, (ME!), and start looking for a home that checks the boxes you need today!

Benefits of a Home Gym

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Exercise is a key part of staying healthy. Every aspect of our lives are impacted by our health, so doing the little things to ensure you stay in shape aids in your overall health. While exercise is important, many of us lead busy lives. Having your own workout space in your home can help you stay active without sacrificing your time. Here are a few benefits to turning that extra room or extra space in the garage into a home gym: 

No Commute Necessary

If you work outside the home, the last thing you may want to do is add more time to your daily commute with a trip to the gym. Instead of spending 2 hours of your time to get an hour long workout, you can enjoy a quick outfit change at home and a 30-second walk to your home gym.

No Closed Signs

Maybe you work late some nights. Maybe you are a morning person and prefer to workout before the sun rises. With a home gym, you no longer have to worry about restrictive gym hours. This is also helpful in creating a routine that you are able to stick to!

No Lines, No Strangers

While many gyms do their best to keep their exercise equipment clean, others leave it up to their clients to wipe down machines after use. If you aren’t a big fan of using sweaty equipment that may or may not be cleaned regularly, a home gym might be just what you need. The best part is, you will never have to wait in line to use a sweaty squat rack again!

No Limits

Do you love cardio machines? Maybe you prefer to run outdoors but love lifting? If you prefer to be able to customize your gym, a home gym allows you that freedom. You won’t need to buy any more than you will use, which makes your home gym a great investment.