The process of buying a home is made up of several stages. After preliminary stages like getting pre-approved, searching for homes, and finding a buyer’s agent, various contracts and buyer-seller agreements will enter the fold as the purchase of a home is finalized. Escrow is a pivotal point in the buying process that will ultimately lead to you, the buyer, receiving the keys to your new home. Here is your guide to understanding escrow and how it works.

A Guide to Understanding Escrow

What is escrow? 

Escrow is a vehicle for temporarily holding the funds in a real estate transaction and making sure they distribute properly when the deal goes through. The funds and documents are held by a third party “in escrow” until the terms of the agreement have been filled. Escrow accounts protect the buyer’s “good faith deposit” (also known as “earnest money”) to ensure it goes to the seller as outlined in the real estate contract. These funds show that the buyer is serious about staying true to their offer and does, in fact, intend to pay the seller.

The seller accepting your offer is your cue to begin the escrow process. Your first step is to open an escrow account. Then, you’ll go about securing a mortgage and obtaining insurance for the home. When the deal goes through, the funds in will go towards your down payment and closing costs. Sometimes, the escrow funds are held in the account after the sale of the home has been finalized. This is known as an “escrow holdback.” This situation can often arise if a buyer discovers an issue with the home in their final walkthrough that wasn’t present during an earlier inspection. If the home is in a worse condition than what shows in the contract, then the good faith deposit will go back to the buyer, and they are released from the contract.

How does escrow work?

Once all the I’s have been dotted and the t’s have been crossed, an escrow officer will issue a deed with you listed as the new property owner. Then, you’ll order a wire transfer for the funds to be allocated. Once closing is complete, the third party holding the escrow funds will distribute them per the terms of the agreement. This distribution of funds make up a part of the total closing costs for buyers, which include, among others, real estate agent commissions, title and insurance fees, and any HOA dues that may apply.

Escrow evolves after the purchase of a home. Once you’ve bought your new house, your lender will open a mortgage escrow account, through which you’ll pay for your property taxes and homeowners insurance. Held by your lender, the money in this account is added to your monthly mortgage payment.

To not get overwhelmed during the escrow process, it’s important to read your documents carefully and ask questions to make sure you understand them. When it comes time to close on the home, read through everything carefully to make sure you haven’t missed anything before the deal goes final. For more information on the required financing throughout the home buying process, read my blog post on the different types of home loans available to buyers:

The Different Types of Home Loans for Buyers

Financing terms are the nuts and bolts of a successful home purchase. Once you’ve decided you’re ready to buy a house, it’s a matter of making the numbers work. So, which home loan is the right one for you? Knowing the different types of mortgage loans available to you will allow you to pinpoint the one that best fits your needs and is financially viable.

The Different Types of Home Loans for Buyers

Conventional Loans

Conventional loans are the most popular type of home loan issued to borrowers. Offered by private lenders, they are not backed by the government. Conventional mortgages divide into two subsets: conforming loans; which adhere to Federal Housing Financing Agency (FHFA) guidelines, and non-conforming loans; which do not. Due to the added risk taken on by the lender, non-conforming loans typically have higher rates. A jumbo loan is an example of a non-conforming loan, due to its loan amounts being higher than the amount limits laid out in the underwriting guidelines. The two most common conventional loans are 30-year and 15-year fixed-rate mortgages.

15-Year and 30-Year Fixed-Rate Mortgages

The terms of your loan will drastically impact all aspects of your mortgage. With a 30-year mortgage, you’ll have lower monthly payments and a higher interest rate than you’d have with a 15-year mortgage, meaning you’ll pay more in interest over the life of the loan. With a 15-year mortgage, you’ll pay less interest, but you’ll have a higher monthly payment. Compared to a 30-year mortgage, a 15-year mortgage can save you money over the life of the loan, simply because you’re in debt for half the time; however, the higher monthly payments may be unaffordable for some.

Government-Backed Loans

Whereas conventional loans are not backed by a federal entity, there are several unconventional loans that are backed by the U.S. government. These unconventional loans can often provide a path to homeownership for borrowers who don’t have the credentials to qualify for a conventional loan.

FHA and USDA mortgages are two common types of government-backed loans. Instead of having to make a 20% down payment on a conventional loan to avoid private mortgage insurance (PMI), an FHA loan allows buyers to qualify for a mortgage with a down payment as little as 3.5%. USDA loans enable buyers to purchase a home with reduced interest rates. VA loans offer several benefits for active service personnel and veterans looking to buy a home, including not having to purchase mortgage insurance.

Fixed-Rate vs. Adjustable-Rate Mortgages

Fixed-rate mortgages allow you to lock in a specified interest rate for the life of the loan. With an unchanging monthly mortgage payment, a fixed-rate mortgage makes financial planning easier. Adjustable-rate mortgages’ interest rates will go up and down based on market conditions. Many ARMs will start with a fixed-interest rate period followed by a variable interest rate until the loan amount is paid off. Keep in mind that a sudden change in your financial situation could make your monthly ARM payments unaffordable, which could result in a loan default.

Other Home Loans

There are other more niche financing options available for prospective home buyers. For example, a construction loan can be useful if you’re planning on building a home. Balloon mortgages and sub-prime mortgages can make homeownership feasible for those who aren’t financially prepared for the typical repayment structure of a mortgage. These loans, however, come with greater risks. Talk to a mortgage broker to understand the terms of these agreements before making a final decision.

For more information on financing your next home purchase, read my blog post on bridge loans:

What is a Bridge Loan?

With continued low inventory and appreciating home prices, the King County real estate market has favored sellers for some time. This year appears to be no different, with homes scarce in Seattle and on the Eastside, the cost of new construction skyrocketing due to the price of land, materials and labor, and the inventory of for-sale condominiums having been whittled down significantly in 2021. So, where exactly is there opportunity for buyers? And in a market that’s both competitive and fast-paced, how can a buyer find success?

To answer this, we spoke to three local Windermere leaders, two based in Seattle and one on the Eastside. Collectively, they shared the vision that this year’s market will pose challenges to most buyers, but that there is opportunity for those who enter the market ready to compete and with realistic expectations. Read on for tips from these seasoned pros who oversee thousands of real estate transactions a year.

Laura Smith, co-owner and designated broker of Windermere Real Estate Co., sees a buyer’s ability to pivot as a key skill in this market. “A market as competitive as this one favors those who are open-minded and flexible,” she says.

Real-time data and savvy guidance from their broker can help a buyer adjust their strategy — and even their economic parameters — mid-search. But, as Smith says, “sometimes they have to have lost a previous offer or two to understand how important flexibility is.”

Matt Deasy, president of Windermere East Inc., even sees geographic flexibility as an important asset to buyers in this market.

“With the median price of Eastside homes setting records, some people may have to adjust their search parameters to include Seattle neighborhoods, or other areas in King County,” Deasy says.

And in some cases product flexibility may even be required, says Patrick Chinn, owner of Windermere Real Estate Midtown.

“As we start to see Seattle’s new construction mix change, bringing more attached homes and more DADUs*, buyers in certain price ranges will need to reset their expectations about space, layout and lot size,” Chinn says.

Chinn notes that some buyers seeking out single family homes may benefit from considering a pivot to condos, since “there are still some great buys in that market.”

All three experts agreed that beyond staying flexible, buyers will need to come to the table well prepared. They’ll need to be ready to waive some or all offer contingencies, and they’ll need to know the amount of money they can bring to a transaction.

“Knowing and embracing their financial tolerances will be key to each buyer’s success,” Chinn says.

“Buyers should be very aware of their upper financial limit,” says Smith. “Ideally before they start seriously searching for homes.”

In some cases, it may benefit a buyer requiring financing to be able to show up to the transaction as if they were a cash buyer.

“Cash buyers often prevail in a multiple offer scenario,” Deasy says, “because the assurance that there’s money already in the bank and the prospect of a faster closing is very appealing to sellers who are sitting on empty homes.”

Deasy, Smith and Chinn all say that their brokers’ clients have had success leveraging the Windermere-affiliated Buyer Capital program, which provides either up-front cash to strengthen a buyer’s offer or a buyer performance guarantee.

“The best thing about this program is that it makes our buyers more attractive to sellers and gets their offers to stand out against the competition,” Deasy says.

Our experts agree that another way homebuyers can succeed in the competitive Seattle/Eastside real estate market is to work with someone who has their back from start to finish.

Due to the nature of the 2022 market, Deasy is unwavering on this point. “Who you hire to guide and represent you will determine whether you can get your home in this competitive environment,” he says. “For buyers, hiring a smart, skilled and strategic broker is everything.”

Smith agrees. “A strong broker will educate and navigate on the subtleties of the market, and this will be key this year,” she says.

In describing the hyper-competitive nature of today’s market and what it takes to win in a frenzied environment, Smith tells the story of one of her brokers who recently helped her client win against 29 offers.

“She had educated her clients so well that they were prepared to do what it took to get the home. They understood the nuances of what the market required and were prepared to go there,” Smith says.

Chinn notes the extra mile that a good broker will go to help their clients succeed. He applauds the hard work and committed service ethic of his brokers, and sees both as key to buyers’ success in a market like this one.

“Every day I see our agents agonizing over the ways the market challenges their buyers and celebrating the wins they help secure,” Chinn says. “Whether they’re supporting a buyer through their fifth inspection, seeking out new inventory to grow their opportunities, or working to save them money, these guys are ridiculously focused, and determined too. They never rest.”

In a low-inventory market like this one, opportunities for buyers can be few and frustrations many. Chinn points out the importance of buyers finding the right person to represent them, someone they connect with and who will advocate fiercely for them.

“To me, an important trend from 2021 that will continue this year is how personal a residential real estate acquisition is, how hard it can be in a market like this, and how the right human touch — with skill and passion and smarts — can solve for a lot of risk and a lot of anxiety,” Chinn says. “No algorithm will ever be able to address that part of the equation.”

*Editor’s note: DADUs are Detached Accessory Dwelling Units, typically a smaller home or cottage sharing a city parcel with a larger residential structure.