How do you explain escrow and closing costs to clients?

Once the seller accepts an offer, the process of transferring ownership begins. The offer is only valid when the deposit funds have been received by the listing agent brokerage and deposited into an escrow account. No one touches these funds until the day of closing. Often the money is referred to as "good faith money" meaning you intend as good faith to move forward. In some states the offer process is a one step process – meaning you place all the deposit money in an escrow account when your offer is accepted & in others it is two steps (offer/home inspection/purchase contract). All of the funds offered by the buyer to the seller are placed in an escrow account until closing day or a written resolution is reached if there is a dispute.

Think of escrow as a neutral holding area for certain funds or important documents during the mortgage process. It helps ensure that all parties—like you, the seller, and the lender—are protected. For example, after you make an offer on a home and it gets accepted, you’ll typically deposit an earnest money payment into an escrow account. This shows you’re serious about the purchase.

For Buyers: Closing Costs are all the fees associated with your loan (loan processing fees, underwriting fee, credit report, flood determination, tax certification fees, points, appraisal charges) then any fee associated with the title work and insurance (lenders policy, municipal lien certificate, examination fees(either by an attorney or a title company)) then charges associated with the property and transfer to you (property taxes from closing until next bill, recording fees, deed, homestead, mortgage); prepaids (usually pre-paid interest, any escrowed monies if required), any fees associated with transferring the property from the sellers to you. In the future it may include buyer agent compensation.

Closing costs refer to the various fees and expenses you’ll need to pay at the end of the mortgage process, right before the home officially becomes yours. These costs can include things like:Loan origination fees,Appraisal fees, Title insurance, Recording fees and prepaid expenses.

Closing Costs typically have been between 1-3% of the amount financed. In the future, it may be more if you choose to use a buyer agent and the sellers are not compensating the buyer agent. FHA loans have higher closing costs, typically than conventional loans however, you have to weight whether or not it is better for you to buy with a FHA or Conventional loan. It depends on the specific situation and how long you plan, in general, to hold the property. There are many reasons to pursue specific financing and it is very personalized. Educate, Educate yourself first time buyer!

To prepare for escrow and closing costs in a residential mortgage, set aside 2-5% of the home’s purchase price to cover fees like loan origination, appraisal, and title insurance. Additionally, expect to make an initial deposit into an escrow account for property taxes and homeowners insurance, which will be included in your monthly mortgage payments. A few days before closing, review the Closing Disclosure to understand all final costs and ensure there are no surprises. Planning early for these expenses will help you avoid last-minute financial stress.

??First Time Home Buyer ?? most banks are going to give you more or less the same interest rate so, you have to also look at other options the lender is offering. Every bank want to sell you a loan so, consider the specials offer that are running at the time, the service the bank gives you and you also make want to consider if the hold the loans in house or if they will be selling your loan. If they tell you they are going to sell it, just make sure you understand how to track it because it is important not to miss any mortgage payments because you didn't know where to send the payment.

In addition to escrow and closing costs, consider your down payment, which can range from 3% to 20% of the home's price, and ensure your credit score is strong to secure better loan terms. Budget for ongoing homeownership expenses like maintenance and repairs, and decide when to lock in your interest rate to avoid fluctuations. Also, shop for homeowners insurance early, as it's required for closing. Proper planning in these areas will help ensure a smooth mortgage process.