When taking out a mortgage to purchase a home here in North Florida, a home buyer should consider all the steps to closing a real estate transaction in order to avoid problems that may delay the closing process or even cause the deal to fall through. Now, one of the “steps” we would like to shade some light on is the deposit a home buyer usually needs to put down when buying a home.
The Importance of Escrow Deposits
Most mortgage brokers require that home buyers open escrow accounts as a condition of getting a mortgage. Often times, the reason why a mortgage broker needs a deposit is to ensure that funds are available to cover different costs related to the transaction.
To begin with, a home buyer typically needs to deposit a sum of money, commonly referred to as earnest money, to show he’s a committed buyer. Assuming that the seller accepts the buyer’s offer, he will take the property off the market as soon as the buyer makes the earnest money deposit. If everything goes well, the earnest money will be applied toward the down payment on the home.
The amount a buyer needs to pay for the earnest money deposit depends on the type of property, its market value, sales price and state laws. In Florida, earnest money deposits commonly vary between 5 and 10 percent of the purchase price of the property. However, the amount of earnest money is negotiable and often depends on the contingencies included in the purchase agreement.
In addition to earnest money, a mortgage broker needs a deposit to ensure there will be sufficient funds to cover the closing costs, mortgage payments, PMI premiums, homeowners insurance premiums and property taxes when due. Besides collecting the amounts necessary for all these expenses, brokers and lenders often require an escrow “cushion” or reserve in the account for unexpected increases. Since mortgage payments, insurance premiums and property taxes are subject to change, the monthly amounts paid from escrow accounts also fluctuate. This may lead to escrow account deficiencies, though it rarely happens thanks to escrow cushions. In case of a deficient escrow account, the lender must notify the borrower, who will need to pay additional deposits.
Many people think that escrow accounts are exclusively intended to protect the lender, and that’s why a broker needs a deposit when someone takes out a mortgage to buy a home. Yet, in practice, they’re also beneficial for borrowers. Depositing the funds necessary in an escrow account can help ensure a smooth and fast house closing. Additionally, making on-going, timely payments into the escrow account over the life of the mortgage allows a borrower to:
- rest assured knowing that the funds needed to pay bills are set aside;
- avoid the sticker shock of having to pay large sums of money every now and then;
- keep track of on-going expenses while there’s a mortgage on his home.
What’s more, federal regulations obligate lenders to review borrowers’ escrow accounts on an annual basis to ensure the correct amounts have been collected.
A word of caution: Homeowners should monitor their escrow accounts and bills’ due dates carefully. If a lender fails to pay the bills on time and in full, the homeowner will be on the hook, not the lender.
Under Florida law, brokers and lenders aren’t required to have escrow accounts. These accounts are usually held by third parties like attorneys, title companies and escrow agents.
Whether you’re looking to buy your first home or upgrade to a new house, please allow our experts at North Florida Mortgage to assist you in weighting your financing options. Not only are our professionals able to recommend a mortgage product that’s right for you; they’ll also guide you through the home buying process and support you throughout the life of your chosen home loan.