The home-buying process involves a lot of paperwork and additional closing costs that you surely want to reduce if possible. For example, recent studies by CoreLogic’s ClosingCorp discovered that Connecticut homes typically have closing costs at about 2.1% of the home’s price, which can equal over $8,000 on a median-priced property.
As a result, you may wonder if you can skip using escrow to speed things up and save money. Discover when you need to use escrow and the reasons for doing so.
When an escrow is necessary
Escrow refers to a third-party service that holds funds and important documents during a real estate transaction. Though Connecticut law does not require an escrow in all cases, it is necessary in certain situations.
For example, if you are getting a mortgage, your lender may require it. This is often because the company wants to ensure the timely payment of property taxes and homeowners insurance. In addition, if you are buying a house in an area with a high risk of natural disasters, such as hurricanes or floods, an escrow may be necessary to ensure that funds are available to repair the property after a disaster.
Benefits of using an escrow
An escrow is useful because it can protect all parties to the transaction. An impartial third party holds your money until all sides satisfy the conditions of the purchase agreement, preventing either the seller or buyer from taking advantage of the other.
To ensure this, the State of Connecticut strictly regulates the use of escrow. For example, the Real Estate Laws and Regulations, Section 20-324k, outlines how brokers hold the funds and the penalties for any violations.
Also, an escrow can streamline the closing process, as necessary documents and funds for the transaction stay in one place. This minimizes the odds of problems arising before the closing or of someone waiting for money and closing documents from the other party.
Without an escrow, you are relying solely on the trustworthiness of the other party to hold funds and documents until closing. This can lead to disputes, or worse, loss of money. In addition, without an escrow, there may be a higher chance of the transaction falling through if either party changes their mind at the last minute.
While an escrow may not be necessary when buying a home in Connecticut, it can offer valuable protections and actually streamline the closing process. Whether you use escrow depends on your personal preferences and the specifics of your purchase agreement.