Today, Maui real estate buyers and real estate buyers everywhere frequently find themselves impacted by the escrow process during the purchase of a home. In this buoyant national real estate market, both sellers and buyers benefit from the creation of escrow accounts. The use of escrow furnishes safeguards for parties entering into real estate transactions by upholding fiduciary responsibilities and rights. It helps protect sellers, buyers, and lenders against fraud.
It may seem tempting to think of a realty purchase as a simple sales event involving only a buyer and a seller. Yet today, this type of property transfer usually affects other parties, as well. The escrow process assists both sales closings and the mortgage lending process.
In many cases, in a real estate market like Maui, many cannot afford to purchase real estate without obtaining financing. Additionally, whenever a real estate closing occurs, it proves important to ensure the satisfaction of any outstanding obligations on the part of the seller to lenders, lienholders, and tax collectors. During the escrow process, an escrow agent assumes responsibility for honoring the contractual requirements agreed upon by the parties to the transaction. Escrow helps prevent one party from defrauding another.
During escrow, a neutral third party holds funds for the buyer and the seller. This “escrow agent” maintains stringent fiduciary responsibilities. For example, banks frequently serve as escrow agents.
The escrow agent by definition lacks a vested interest in the outcome of the transaction. Today, a variety of sales sometimes rely upon escrow. The sales of valuable artwork, jewelry, and securities, frequently involve the creation of escrow accounts.
Although provisions differ from one jurisdiction to another, typically state laws require real estate industry professionals to assist their clients by depositing the earnest money submitted by a prospective buyer into an escrow account. Imagine the problems that might arise if a seller simply pocketed a buyer’s initial deposit on a home and then resold the property to someone else? Escrow ensures a neutral third party holds the funds until the closing.
During the closing process, a closing agent accepts funds from escrow and disburses them only in accordance with the terms of the sales contract. Escrow helps protect all of the parties to the sale. Sellers gain the assurance a buyer will have sufficient funds to close the transaction. Additionally, if a contract makes a sale contingent upon a property inspection, a buyer has an opportunity to review the findings of the home inspection firm prior to the closing. Real estate agents don’t receive their commissions until the satisfaction of the terms of the sales agreement and the transfer of title. The use of escrow accounts helps protect real estate sellers in all these respects.
Yet the use of escrow accounts also holds important safeguards for real estate buyers (and their lenders). Typically, during a closing, a seller leaves escrow with the disbursement of the proceeds from the realty sale. In many cases, a buyer at the closing enters into a new, long-lasting, mortgage escrow relationship at this time.
The robust prices of homes for sale on Maui prevent many buyers from purchasing real estate outright for a lump sum. These buyers frequently apply for mortgage loans. During a closing, a mortgage lender pays the full sales price to the seller (and the seller’s lienholders and creditors). The new purchaser then begins making escrow payments to the lender who supplied the cash to close the transaction.
Why do many lenders require the implementation of ongoing mortgage escrow accounts? Just as a contract exists between a seller and a buyer prior to closing, the sale of realty may initiate a mortgage loan contract between a mortgagor and a mortgagee. Many lenders require the establishment of a mortgage escrow account during the course of loan repayment. This process helps ensure the parties honor the terms of loan agreements.
Homes for sale on Maui usually require a new homeowner to pay recurring annual real estate property taxes. Additionally, many mortgage lenders insist that purchasers obtain homeowner’s insurance for the duration of the loan period. The lender typically seeks to ensure it will obtain compensation for outstanding mortgage loan debt if accidental damage occurs to the premises. Mortgage escrow accounts usually collect funds from buyers to pay for homeowners insurance premiums, property taxes, and other ongoing fees.
Escrow accounts help maintain the integrity of real estate sales. They greatly assist all of the parties involved in these transactions on Maui. Don’t hesitate to insist upon the use of this valuable business tool!