When buying a home in Omaha and getting a mortgage, you will hear the term "escrow" mentioned frequently. An escrow is a legal arrangement where a third party holds money or property until a specified condition is fulfilled, such as completing the home purchase as outlined in the agreement.

Escrow protects buyers and sellers during the transaction. The escrow account also holds funds for homeowner's insurance and taxes associated with the mortgage.

There are two types of escrow accounts in real estate: The first holds your good faith deposit to ensure it goes to the right party based on the sale conditions. The second holds funds to cover property taxes and homeowner's insurance.

Escrow Accounts for Buying a House in Omaha

When buying a house, you'll sign a purchase agreement that usually includes earnest money, also known as a good faith deposit, to demonstrate your serious intent to purchase the property. This deposit typically involves providing a personal check for 1-2% of the offer price when making the offer, although it may be higher depending on market conditions.

If the home purchase goes through as planned, the deposit will be applied to the down payment as the buyer. However, if the contract falls through due to the buyer's fault, the seller will likely retain the deposit. The buyer will receive the deposit back if their offer is rejected.

The funds may be held in escrow past the home sale as an escrow holdback. This can happen for various reasons, like issues found during the final walkthrough. For a new home purchase, the money stays in escrow until the buyer approves the work. Once conditions are met, the escrow funds are released.

Taxes and Insurance

After purchasing a home, your lender establishes an escrow account to pay your insurance premiums and property taxes. When the closing is finalized, the mortgage servicer allocates part of your monthly mortgage payment into this account, retaining the funds until it is time to disburse payments for insurance and taxes.

Your escrow payments may change yearly, as your property tax bill and insurance premiums often fluctuate annually. To calculate your escrow payment amount for the upcoming year, your mortgage servicer reviews what was paid from your escrow account in the previous year. They then add a cushion of at least two extra mortgage payments to ensure enough funds will be available to cover any increases in your taxes and insurance.

Lenders will analyze an escrow account annually to ensure they are not collecting too little or too much. If the analysis shows the lender collected too much for taxes and insurance, they will refund the excess amount to you. However, if the lender collected too little, you may need to cover the difference.

Who Manages These Accounts?

If you’re buying a house, an independent third party such as a mortgage service company, title company, or real estate agent will likely manage the escrow account containing your deposit. The escrow company, acting as a neutral intermediary between buyer and seller, will hold the deposit, deed, and other sale documents until the transaction closes. The buyer and seller typically split escrow fees.

Your mortgage servicer manages your mortgage from the closing until you pay it off. They are responsible for collecting payments, maintaining payment records, and managing your escrow account.

An escrow account does not cover all homeownership expenses. It does not pay for HOA fees, utility bills, or supplemental taxes. Lenders cannot predict if or when you will receive a supplemental tax bill, or how much it will be, so you must budget for these potential expenses separately.

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