How to Protect your Escrow Deposit

As a new home buyer, the stress of the process can be daunting. Knowing how to protect your escrow deposit will alleviate some of the worry as you make one of the largest purchases in your life.

Escrow generally refers to money held by a third-party on behalf of transacting parties. It is best known in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage).

Follow these steps to protect your escrow deposit:

  1. Get it in writing.You need to get written notice that your loan has been approved, and make sure the property doesn’t appraise for less than the purchase price.Given tougher lending standards since the housing and credit crisis, the appraisal/loan contingency is more important than ever. A contingency clause allows the buyer to receive full written approval from the lender, before moving forward to the closing. So, if your loan is denied for whatever reason, you can exit the contract and get your deposit back.If your loan broker isn’t willing or able to give you written notice that your loan has been fully approved, do not remove this contingency. If you do, you risk forfeiting your deposit. Some lenders will pull out or deny the loan at the last minute — like the day before they’re set to fund.
  2. Review the property disclosures. You should receive the seller’s disclosures and any required reports soon after your offer is accepted. In some markets, you may receive these disclosures before you make an offer. If you discover something negative about the property, this is your chance to say “no thanks” to the seller.However, you’ll be required to sign off on these disclosures and reports at some point. Once you’ve done that, your deposit is at risk. So take your time. Review everything carefully. Don’t be afraid to ask questions about what you’ve learned.
  3. Carefully and diligently, get to know the property. Should the inspection uncover some problems, it’s time to decide if you can live with them or not. Inspection contingencies are often so general that the buyer can get out of the contract and have their full deposit returned. Some call it the “cold feet” contingency, because sometimes buyers walk after the inspection, even if there weren’t major issues.

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