Navigating the escrow/settlement, mortgage and homeowner’s insurance processes

by | Jun 8, 2021

Buying a home can be stressful enough. But your anxiety level may increase at the thought of the process of purchasing a home

Escrow, mortgage and homeowner’s insurance might come to mind as those necessary but intimidating steps in the mortgage process. Have no fear, though. With a little research, you can easily navigate each one and feel confident as you get through this exciting time.

Here are some basics you need to know about escrow, mortgage and homeowner’s insurances.

Let’s start with private mortgage insurance for conventional loans. Also known as PMI, this is a monthly payment that homeowners will take on if they did not pay at least 20% for a down payment. Because of the higher financial risk, lenders will require borrowers to pay for the insurance until the outstanding balance reaches a certain point. Some lenders will automatically remove the requirement. You can also begin the discussion once 20% equity is reached or the mortgage balance reaches 80% of the home’s appraised value.

While mortgage insurance protects the lender, homeowner’s insurance protects you and the lender from certain events like fire or weather-related events that cause damage to the home. Depending on your situation, homeowner’s insurance will also be a requirement before getting the green light on a mortgage. Given the financial stakes involved, lenders will want to make sure the home is insured before partnering with you. This insurance will also cover personal belongings, liability and other things.

Finally, none of these processes can be carried out without escrow. Escrow is the overall process led by a third-party settlement agent/escrow officer that will mediate the real estate transaction and all the moving parts. The Escrow Officer will hold onto deposits and pertinent paperwork until the sale is finalized.

When people refer to closing a deal, it’s typically meant that the escrow/settlement process is complete. Once you close on your home, the mortgage payment may include items for an escrow account, if an escrow account is required or otherwise requested, to help pay for PMI, home insurances and property taxes.