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How Escrow Accounts Work for Home Buyers in California

When buying a home in California, or even when simply researching the process, you’ll eventually encounter the term “escrow account.” This can be a very confusing subject for first-time buyers, in particular, since they’ve never been through the process before.

So, what is an escrow account exactly? And how does the process work for California home buyers? That’s the subject of today’s tutorial.

Different Kinds of Escrow Accounts in California

Let’s start with a basic definition and move on from there. In general terms, an escrow account is a type of legal holding account used for a short period of time. They’re typically used to hold funds relating to certain types of transaction, such as a home purchase.

You might actually encounter two different types of escrow accounts when buying a home in California, and when making your mortgage payments each month. This is one reason why home buyers tend to find this subject so confusing. There are different types of accounts, and they often go by different names.

Here are the two types you might encounter:

  • The first type of escrow account is used during the home buying process. It usually includes the earnest money deposit, down payment and closing costs.
  • The other type of escrow account is used for property taxes and insurance, and is managed by your mortgage loan servicer.  Once you take ownership of the home, your servicer will take a portion of your monthly payment and hold it in an escrow account until your tax and insurance payments are due.

So there’s one type of account that you encounter during the home buying process, and another one that relates to your monthly mortgage payments. In a typical real estate transaction, these are usually two different things.

To avoid confusion, it’s probably best that we focus on just one of these accounts for this article. So let’s talk about the one that’s used during the home buying process.

A Safe Place for the Home Buying Funds

When you make an offer on a house, you might also make an earnest money deposit to show the seller that you are serious about purchasing the home. This is common practice within the California real estate market, and elsewhere across the country.

This money needs to go somewhere, and the escrow account is one place for it. The earnest money deposit can also be held by a real estate brokerage, but that’s the subject for another article.

You might also make a down payment on the house, and pay closing costs to cover all of the fees that can accumulate during the process.

All of these different funds go into an escrow account, which is managed by an escrow agent or company. You can think of these people as a neutral third-party whose job it is to manage and release funds relating to the real estate transaction. They act as temporary custodians, up until closing day.

These funds will be held in the escrow account until all relevant conditions have been satisfied or completed. At that time, the escrow agent or company will release the funds to the appropriate parties, so the sale can be finalized.

It’s All about Keeping the Process on Track

In order for a real estate transaction to move forward, all of the necessary funds and paperwork need to be in place. This is where the home buyer’s escrow account comes into the picture. The escrow company will make sure that everything is in place leading up to closing day.

If it weren’t for escrow companies, real estate transactions would be a lot messier than they are. There would probably be a lot more confusion as well. These companies help to keep process on track, by making sure all of the funds are present to complete the transaction.

As you’ve probably already guessed, you will likely pay a fee for the escrow company’s time and services. This is one of the fees that make up your closing costs, along with mortgage-related fees, government recording fees, etc. In California, the cost of escrow services can vary based on the price of the home and other factors.

Have Questions About the Mortgage Process?

Bridgepoint Funding serves home buyers and homeowners all across the state of California. We are a mortgage broker, which means we can offer a wide range of loan options. We can also answer any questions you have about qualifying for a home loan, or other aspects of the mortgage process.

In addition, we regularly publish articles relating to the home buying process in California. Our blog currently offers more than 200 articles, many of which are geared toward buyers. You can access all of this information by using the search tool at the top of this page.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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