At some point a long, long time ago buyers and sellers decided they needed a method to help facilitate transactions and voilà, the escrow account was born!
What is an Escrow Account?
According to the California Escrow Law, an escrow account is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a specific condition or event. Simply put - it is separate account which protects the interests of all the real estate transaction parties. It houses all monies, instructions and paperwork necessary for the impending real estate sale, including funds for the down payment and the deed to the home.
Why Is an Escrow Account Important?
An escrow account provides both the seller and buyer with one, simple guarantee: no funds or property will be transferred until every escrow term and condition has been met.
How Does the Escrow Process Work?
The buyer, seller, and lender draft the terms of the escrow agreement. This document is then signed by all parties and is sent to the escrow agent. It is here that the escrow agent will process the funds and documents, in accordance with the escrow instructions. It is important to note that typically, the buyer will instruct the escrow officer to release funds only when title insurance has been issued and the seller’s deed has been signed. Remember, escrow is not complete until all the terms have been fully satisfied and all the parties have signed the appropriate documentation.
How Do I Open an Escrow Account?
Generally, the buyer’s or seller's real estate agent will open the escrow account. In fact, after completing the Purchase Agreement, the real estate agent will put the initial deposit in escrow.
What Happens after I’ve Signed the Closing Escrow Papers?
After both parties have signed all the necessary instructions and documents, the escrow officer will return the buyer's loan paperwork to the lender for final inspection. Once this step is complete, the lender will then grant permission to fund the buyer's mortgage.
What is an Escrow Closing?
An escrow closing marks an end point in the real estate sale process. It represents the legal transfer of title from the seller to the buyer. All documents and funds have been collected and properly disbursed, meaning you – the buyer – now own your home (subject to the mortgage, of course)!
Buying and selling real estate can be a rather complicated affair. There are numerous agreements to be signed, documents to be exchanged, and monies to be disbursed. Fortunately, you don’t have to go it alone! There is help available through your local title company – an organization that ensures all buyer paperwork and funds will be in order and ready to distribute prior to closing.
To help give you a better sense of the full scope of title company capabilities, here is a quick list of their typical responsibilities:
One of the most important roles of a title company is to perform a title search. This process will provide insight into a home’s owner history – who bought the property, who sold the property and when the transactions occurred. It will also determine if there are any demands, liens, or other restrictions on the property. Lenders will not issue a mortgage without a title search.
Once the review has been completed, the title company will then produce a report of search findings. This title report will list any concerns or problem areas that could potentially stall the sale of the home or cause future fraudulent ownership claims.
Another important role of the title company is to issue title insurance. Although a title search is conducted prior to settlement, it is practically impossible to ensure a title is clear of all hidden defects, resulting from undisclosed heirs, forgotten wills, invalid court proceedings, or defective deeds.
Title insurance policies, therefore, guarantee the title as reported and recorded. These policies protect a buyer from fraudulent ownership claims and promises relief for the buyer, should any unforeseen defects arise during homeownership.
Closing Agents and Escrow Officers
A title company may also serve as a closing agent and/or escrow officer during settlement. In this case, your title company will act as a mediator between the selling and the buying party, ensuring that all necessary documentation is signed and recorded. The title company will also oversee that all funds, including closing costs and down payments, will be paid and properly disbursed.
Closing can feel like a whirlwind. But with the help of a title company, you can avoid much of the settlement stress. To find a local title company in your area, contact your real estate professional today.
Each year between 60%-80% of Americans (depending on your sources) receive a tax refund. Undoubtedly, we can all find ways to spend some extra cash. But if you are looking to use your refund to improve your overall financial picture, than paying down the mortgage should be high on your list.
The Benefits of Paying Down Your Mortgage:
By making additional payments on your mortgage, you can reduce the amount of interest you will pay over the life of the loan. And the savings can be significant!
Years ago when interest rates were much higher, it was not unusual for the interest on a 30-year mortgage to exceed the principal. Even with today’s low rates, a mortgage’s full interest can still be hefty. For example, at a low rate of 4%, the interest on a $250,000 loan will be close to $200,000 - meaning the borrower may pay over $400,000 in total.
By paying down your mortgage early, you can make a significant dent in the interest you’ll pay over time. This will allow you to build equity faster, enabling you to own your home sooner.
In addition, those who pay down their mortgage may also have the option of eliminating private mortgage insurance, or PMI. Remember, PMI is the insurance you must carry if you put down less than 20 percent on your home. With this in mind, it can make sense to send in extra payments when possible, as these will help you pay off that initial housing deposit and get rid of that pesky PMI.
Is This the Right Choice For Me?
Before you decide to send that nice refund check to your lender, make sure to weigh your options. Depending on your unique financial situation, there may be better uses for your tax refund, such as:
- Creating an Emergency Fund:
- Many experts suggest creating a cash cushion to cover unexpected expenses, such as a burst pipe or termite invasion. The goal is not to be cash poor when paying down your mortgage. Otherwise, you could find yourself borrowing more money at a much higher interest rate to handle an unforeseen financial crisis.
- Maxing Out Your Retirement Accounts:
- Whether it’s a 401(k), an IRA, or some other type of account, maxing out your retirement savings should be a top priority. Putting in a substantial amount of money into your retirement fund can become even more beneficial if your employer promises to match part or all of your financial contributions.
- Paying Off Outstanding Debt:
- It’s important that you focus on paying off all your debt obligations when considering sending in additional mortgage payments. Remember, credit card debt carries high interest, reaching 22% in some cases.
Watch Out for Prepayment Penalties!
In addition, while it can be helpful to send in an extra payment, it is important that you identify whether or not your loan has any prepayment penalties associated with it. Keep in mind, a prepayment penalty, or a prepay, is an agreement which regulates how quickly a borrower may pay off a loan. Frequently, borrowers are only able to pay up to 20 percent of their loan balance each year. If the homeowner exceeds that amount, they may be charged a prepayment penalty.
Therefore, make sure you ask your lender if there are any prepayment penalties associated with your loan before you send in any extra payments.
A Word to the Wise:
If you decide to use your tax refund towards paying down your mortgage, be certain your check goes towards your loan principal. Highlight any extra payments you make and tell your lender that you want that money to be applied to principal only. If you do not specify, that extra check could be mistaken as an early payment and may not be applied towards your principal amount. Therefore, we suggest writing a separate check for any additional payments you choose to send in. This will avoid any unnecessary confusion.
Additionally, make sure to examine your end-of-the-year statement to ensure that all additional payments have been applied as requested.
Last, deciding to pay down your mortgage is a decision that requires quite a bit of thought and planning. Please consult a financial professional for more information specific to your personal circumstances.
America’s mortgage industry is slowly recovering. But, according to real estate site Zillow, 16 million homeowners still owe more than their homes are worth. And, while taxes may not be top of mind for these underwater homeowners, there are some helpful advantages afforded to these borrowers via the Mortgage Forgiveness Debt Relief Act.
A Mortgage Forgiveness Debt Relief Act Briefing
Prior to the Mortgage Forgiveness Debt Relief Act, struggling homeowners were forced to pay taxes on forgiven debt. It may sound backwards – why should you have to pay taxes on money you lost? But the IRS viewed the forgiven debt as a gift.
For example, according to MarketWatch.com, a borrower who owed $200,000 in the 25% tax bracket who sold his home in a short sale for $150,000 would typically pay $12,500 in taxes. That’s because that the IRS views the $50,000 break as taxable.
Previously, there really was no way around it. In fact, the only way one could avoid such a tax would be to declare bankruptcy or claim insolvency, stating that your debts outweighed your assets.
But thanks in part to the special federal tax break – the Mortgage Forgiveness Debt Relief Act – underwater homeowners can now avoid paying this extra tax. For example, that same borrower who owed $200,000 in the 25% tax bracket would pay no taxes for a $150,000 short sale. Notably, the bill allows the Internal Revenue Service to exclude up to $2 million in forgiven mortgage debt in buyer income statements.
It is important to note, however, that this tax break is not all inclusive. If you took cash out of your home during refinancing and used it towards paying for your child’s education, family vacations, or home improvements, you will not be eligible for the Mortgage Forgiveness Debt Relief Act.
Additionally, not all local governments adhere to federal rulings. In fact, homeowners in certain states may still be forced to pay state income taxes on that forgiven debt.
So, What Do You Need to Qualify?
In order to qualify for the debt relief act and not be forced to report the cancelled debt, one must have:
- Forgiven debt on your principal residence
- Debt reduced or forgiven through mortgage restructuring, foreclosure, or short sale
- Up to $2 million of forgiven debt
- Only used forgiven or cancelled debt to buy, build or substantially improve his principal residence
Will I Receive Any Paperwork?
If you do choose to have your mortgage debt forgiven, you should receive a 1099-C, Cancellation of Debt from your lender. This statement will detail the amount of debt that was forgiven. It will also list the current market value of your home. You will need to reference these numbers when filing your taxes.
The information provided above is not intended to take the place of professional counsel. If you believe you qualify for tax exemptions under The Debt Relief Act, contact your tax advisor for more information and further eligibility requirements.
Buying a home is often the greatest expense any borrower will ever incur. Therefore, it is important that you protect and maintain this investment. Among other things, that means always paying your homeowner’s insurance and property taxes on time, every time. But with so many other costs to monitor, it may be difficult to budget appropriately for these hefty expenses. Fortunately, there is an alternative for homeowners wishing to lessen the burden of remembering and meeting those insurance and tax bills. This option is known as an impound or escrow account.
Mortgage Impound Accounts: A Quick Definition
A mortgage impound account is a fund which houses monies for future insurance and tax payments. Homeowners will make incremental deposits to the account in addition to their monthly mortgage payments of principal and interest. Then, when it comes time for the yearly homeowner’s insurance or property tax payment, money will automatically be withdrawn from the fund. This ensures that your insurance and tax bills will be made on time and in full. Best of all, you won’t have to worry about paying off these big ticket items in one lump sum.
Your Initial Impound Payment: Planting the Seed
When you first establish an impound account, a deposit of between two to eight months’ worth of property taxes and insurance payments are placed into the fund, as set forth in the Real Estate Settlement Procedures Act or RESPA. This initial sum is known as the impound deposit or seed payment. The initial amount can include up to a two months cushion. This financial padding is to ensure there are sufficient monies available as the taxes and insurance are due.
Once you’ve made your first deposit, you will then begin making regular monthly payments to your impound account. To determine how much money should be collected each month, a homeowner’s estimated annual insurance and property taxes is simply divided by 12 months. That amount is then added on top of the borrower’s monthly principle and interest amounts. Simply put, you’ll be putting money into your impound account along with every mortgage payment.
The Annual Impound Statement
To help borrowers keep track of their impound account’s health, RESPA requires lenders to provide annual impound statements. This document will summarize and detail each impound deposit and payment made throughout the year. The statement will also alert the borrower to any fund deficits or surpluses. Keep in mind, however, that if your taxes and insurance increase and your loan servicer collected too little, you will remain responsible for that lapse in insurance or property tax payment. Likewise, if your lender has over-estimated the amount required and collecteds too much, they are required by law to make you a refund.
Before you choose to open an impound account, there are a few details you should consider.
- You will typically not accrue any interest with an mortgage impound account (though interest is required in some states). This means what you put into the fund is what you’ll get out of the fund.
- Although most lenders have systems in place to ensure your insurance and tax bills are paid on time, like any other process, there is potential for error. Payments may fall through the cracks. Therefore, be certain to continually check on the status of your impound account. Make sure there are enough funds in place and the correct dates of payment have been submitted.
- Cancelling an impound account can be difficult. While you can always petition to have the fund closed, loan programs, such as FHA, typically only allow this option for borrowers who have achieved 20% or more equity in their homes or have chosen to refinance their properties.
Preparing to budget for your yearly insurance and tax payments can be a hassle. But with an mortgage impound account, you have the ability to put a little away each month so you don’t have to pay off these expenses all at once. Just remember to continually monitor your account. Make sure there are enough funds available and the correct payment dates are logged. Most importantly, never hesitate to contact your lender if you have any questions about fluctuations in impound amounts. Remember, you are always entitled to an analysis that details how your impound money is being disbursed.
When you first purchased your home, you may have paid “points” to lower the interest rate on your mortgage. While you knew that it would save you a lot of money over time, you probably didn’t realize those same points could save you some money right away.
Under certain circumstances, this pre-paid interest can be deducted from taxes, but many homeowners often overlook this benefit. Of course, the guidelines are complicated so it’s always a good idea to check with your tax advisor before filing.
The Nine Criteria: IRS Guidelines for Mortgage Point Tax Deductions
Mortgage points can be deducted fully or over the life of a loan. Typically, most homeowners must amortize their deductions over the loan term. But, if you meet the Internal Revenue Service’s following nine criteria, you may be eligible for a full deduction in the year of payment and a greater tax break:
- The loan must be secured by your main home.
- Paying points is an established business practice in your area.
- The points are generally what are charged in your region.
- You use the cash method of accounting, meaning you record income in the year you receive it and deduct expenses in the year you pay them.
- The points are not paid in place of amounts ordinarily stated separately on the settlement sheet. That is, you cannot pay points in exchange for appraisal fees, inspection fees, title fess, attorney fees and property taxes.
- The funds you come up with at or before closing, plus any points the seller pays, must be at least as much as the points charged. In addition, you cannot have borrowed any of the settlement money from your lender, mortgage broker or bank.
- The loan is used to buy or build your main home.
- The points are computed as a percentage of your mortgage’s principal amount.
- The amount is clearly shown on the settlement statement as points charged for the mortgage. The points may be shown as paid from either buyer or seller funds.
Just keep in mind - these criteria only apply to costs associated with your primary residence. Points paid to purchase a second or vacation home must be amortized over the life of the loan.
Refinance Point Tax Deductions
For those who have chosen to refinance, the IRS states that all associated points must be deducted over the life of the loan. However, if any portion of those refinance points is used towards home improvements and meets criteria one through six (as listed above), those points may be fully deductible in the year paid. The remaining refinance points, however, will not qualify for an immediate tax deduction. Rather, this leftover balance must be deducted over the life of the loan. This same tax rule also applies towards home equity lines of credit and home equity loans.
Words of Wisdom
To ensure you reap the full rewards of your mortgage point tax break, make sure to consult your tax advisor and file with precision.
For more information regarding the deduction of mortgage points, please visit the Internal Revenue Service’s Home Mortgage Interest Deduction page.
You submitted your loan application two weeks ago. But, you have yet to hear back from your lender. You may begin wondering, “What’s the hold up?” Well, it could be any number of things. In any case, do not fret. Your loan application will get processed. It just may take a little bit longer than you had initially expected.
To help you better understand how the loan process becomes delayed, here’s a quick list of few common bottlenecks lenders face.
During loan processing, your application will pass through the hands of 20 mortgage professionals, at least! And with so many people handling your application, it’s easy for processing to get backlogged. Remember, your file must be checked by the processing team, the underwriting team, and the settlement team – in that order. That’s a lot to coordinate!
Influx of Loan Applications
With interest rates near record lows, you may be considering locking in some new mortgage terms. But, you’re not the only one with that thought. When rates drop, volume goes up. This could certainly equate to a longer processing time for your mortgage application.
Processing is most commonly delayed by document verification. Remember, lenders need to fully assess a borrower’s risk before choosing to approve or deny a loan request. Among others, this means verifying employment with managers, obtaining mortgage history from credit bureaus, and acquiring rental records from previous landlords. Confirming this information can take time - especially if your references are difficult to contact or less than cooperative.
Doing More with Less
As a result of the subprime mortgage crisis, lenders are now subject to stricter lending standards. Re-examinations and verifications of all applicant documentation are a necessity. Employees must adhere to the robust guidelines and accommodate the ever-growing list of compliance checks, extending the processing timeline.
Speeding Up Processing: Some Helpful Tips
Never fear. There are a few steps you can take to help simplify the job of your lender and speed up that loan process.
First, be available. While processing and underwriting your loan request, your lender may ask for additional information. Among others, they may have questions regarding a lapse in employment history, a maxed out credit card, or a sudden drop in income. No matter the query, make sure to respond promptly. Be available and willing to answer questions.
Second, provide all requested information upfront. One of the most important components to shortening the loan process is – accuracy. Omitting your employment history, excluding open credit card accounts, or fudging past debts will not help you secure a better interest rate or loan. In fact, it will only add to the complexity and elongate your processing time. Lenders will verify all information submitted via loan application.
Last, do not be afraid to ask questions. If you are unsure or confused by any part of the application, speak with your lender. It’s better to address any issues upfront, than to leave questions blank or omit any documentation.
To learn more about what you can do to speed up your loan process, read our blog post Four Ways to Simplify the Loan Process.
Knowledge@Wharton recently explained recent research that shows just how bad we are at differentiating between good and bad advice when we're anxious. It seems the more worried and uncertain we become, we become more open to advice and less discriminating about the
This is important to keep in mind when you're in the middle of the home loan process - be it buying your first home, refinancing, or even seeking a loan modification from your lender. The home loan process can almost be the textbook case of worry and uncertainty; it's complicated, involves large sums of money, and the stakes can be high if you're bidding on a new home or negotating to stay in your current one.
At their most vulnerable, borrowers are a risk for scams or mortgage fraud. More commonly, anxious borrowers simply may not be getting the best deal. Roughly half of lower income consumers only obtain a quote from one lender when looking for a mortgage, according to a recent Fannie Mae study. The same study found low income borrowers are also much more likely to accept the recommendation of their real estate agent or mortgage broker when choosing a lender.
What You Can Do To Improve Decision Making
- Shop multiple lenders. Try to get a quote from at least three lenders. The Federal Reserve puts together a mortgage shopping worksheet that you can use when gathering quotes.
- Check licenses. The Nationwide Mortgage Licensing System (NMLS)has a free service for consumers to confirm that the financial-services company or professional with whom they wish to conduct business is authorized to conduct business in their state.
- Do your own research. Ask for references and do some online research - knowing online sources can often be less than reliable, too.
Most importantly, stay relaxed. The researcher of the anxiety study "suggests that people refrain from making major decisions until they are in a relaxed state and are able to clearly reflect on the matter at hand. In addition, he adds that the key element to conquering anxiety is self-confidence." If you follow the above steps, you'll hopefully feel more confident and relaxed that you're making the right decisions about your mortgage.
Refinancing can be a great option for homeowners seeking to lock in today’s historically low interest rates. The process – collecting documentation, ordering credit reports, and arranging a home appraisal – can be both tedious and time consuming. Fortunately, many borrowers are eligible to take advantage of the FHA Streamline Refinance, which reduces much of the work involved in the process.
FHA Streamline Refinance – More Bang for Your Buck
The FHA Streamline Refinance is a special mortgage product reserved for current FHA-insured borrowers. The program allows homeowners to bypass many of the traditional underwriting requirements. This means: no new documentation, no new credit checks, and no new home appraisal. This is particularly good news for underwater homeowners, who may owe more on their homes than what they are currently worth.
Best of all, applying is quick and easy. All that’s needed to qualify is:
• An FHA-insured mortgage
• No delinquent payments in loan payment history for the past 12 months
• A record showing you have not refinanced within the past 210 days
In addition, applicants must demonstrate that the FHA Streamline Refinance will result in a net tangible benefit to them. The FHA and your lender want to ensure that the refinance will help you save a significant amount of money. They don’t want you to lose money or barely break even. As a result, the FHA states that a borrower’s monthly mortgage payment must decrease by at least 5%, or a borrower must refinance from an adjustable to a fixed rate loan. Since the emphasis of the program is improving your financial position on your home loan, you cannot take cash out of your home equity through the FHA Streamline Refinance.
The Impact of Mortgage Insurance Premium – Some Dates to Consider
Before you commit to an FHA Streamline Finance, however, note the date when you initially closed on your current mortgage. This can greatly impact the cost of your mortgage insurance premium (MIP) – and affect how much you’ll actually save by refinancing.
As of this past June, the FHA introduced a new initiative: if you are refinancing an FHA loan taken out before June 1, 2009, your annual mortgage insurance premium will be 0.55% of your given loan amount. If you are refinancing an FHA loan taken out after June 1, 2009, your annual mortgage insurance premium will be 1.25% of your given loan amount.
For example, let’s say you took out a $100,000 mortgage prior to June 1, 2009. Your annual mortgage insurance premium would be $550 a year. But, if you took out a $100,000 mortgage after June 1, 2009, your annual mortgage would be $1,250 a year. That’s a $700 difference!
So, make sure to review the day on which your current mortgage closed to determine if you’ll qualify for the lower MIP rate.
A Streamline Recap
An FHA Streamline Refinance can be a great option for FHA-insured homeowners. With minimal requirements, this program allows borrowers to avoid the hassles of a typical refinance. Most importantly, the FHA Streamline Refinance enables homeowners to quickly and easily secure better interest rates and lower those monthly payments.
To learn more about the FHA Streamline Refinance or to find lenders offering this program, check out the HUD lender list.
If you meet these guidelines, you can contact your current mortgage lender to inquire about a streamline refinance. You can also contact other mortgage lenders to compare rates and fees. Different lenders have different loan requirements, so even if one lender turns you down, another may be willing to work with you.
To find out more about an FHA Streamline Refinance with PennyMac click here.
Mortgage Lenders have been working hard to improve speed in closing loans. Adding staff and improving technology have helped lenders tackle the spike in refinancing demand triggered by low mortgage rates. You can help your lending team move your loan to your closing date. Rest assured, a little prepping and planning can go a long way. Here are a few actions you can take to help you simplify that loan process:
Know Your credit Scores Ahead of Time
Make sure to check all three major bureau credit scores before contacting any mortgage lender. This gives you the opportunity to do any credit repair work, including correcting any errors and being ready with letters of explanation, if your lender needs them. It also helps your loan officer know your eligibility for certain loan programs. Conventional loans may require a FICO score above 740 for best pricing; many of the homeowner refinance assistance programs, such as the FHA Streamline refinance or HARP, for example, may permit lower scores.
To learn more about how to protect your credit score, check out PennyMac’s previous blog, “Ten Ways to Protect Your Credit Score for Mortgage Application”.
Gather All Documents Sooner, Rather Than Later
Borrowers are often required to provide significant paperwork when qualifying for new loans, including: tax returns, pay stubs, and statements of outstanding debts and assets. If you're refinancing, you'll need copies of your homeowners insurance. Gathering all of this paperwork last second can leave even the most experienced procrastinator in a tizzy. So, we suggest collecting these documents ahead of time. This will allow you to more quickly and easily fill out and submit your loan application. And, it will help your lender get a more accurate picture of your financial health from the get-go.
Respond Promptly to All Requests
While processing and underwriting your loan request, your lender may ask for additional information. They may have questions regarding a gap in employment history, a maxed-out credit card, or a sudden drop in income. No matter the query, try to respond promptly. Remember, lenders need to clear up any uncertainties before they can commit to lending you a mortgage.
Honesty is the Best Policy
Perhaps one of the most important ingredients to shortening the loan process is – accuracy. Omitting parts of your employment history, excluding open credit card accounts, and fudging past debts will not help you secure a better interest rate or loan. In fact, it will only add to the complexity and elongate your processing time. Remember, lenders will verify all information submitted via loan application. They want to be certain that your financial profile is true and accurate. This will help them successfully determine the best loan for you and your lifestyle.
Completing the loan application process can be intimidating at first glance. But, if you’re prepared beforehand, you can save yourself a great deal of grief. So, make sure to:
• Know your credit scores ahead of time
• Gather all documents sooner, rather than later
• Respond promptly to all requests
• Be honest with your information
Taking these actions can ultimately help you simplify the loan process and help you get the keys to your new home a little sooner.