Your Money And Where It Goes

This episode breaks down the financial side of buying a home, focusing on earnest money, escrow accounts, and how funds move during a real estate transaction. Listeners will learn what counts as valid funds, how title companies handle money, and what protections exist to avoid losing earnest money. Practical tips are included for preparing money for closing and understanding credits, debits, and the role of escrow in both closing and ongoing mortgage payments.

Transcript

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Hey everyone, welcome back to all things home loans, credit, and real estate. I'm your host, Deb, the Mortgage Queen. So let's start learning. Alright, we're back. Deborah here, known as the Mortgage Queen. It's a title I gave myself, but I feel like I can own it. I do. Today we're gonna talk about some cool things. Um your money. Let's talk about your money. And when it comes to a real estate transaction, I want to talk about earnest money, what does that mean? Uh, your escrow, uh definition of escrow. There's two of them, um, and and just kind of how everything just plays out when it comes to just the actual monetary side of things. Um, so let's talk about first what actually is earnest money. When and we're talking purchase, earnest money is only come into play when you're doing purchase. And earnest money is the money that you put for the skin in the game. Basically, it binds the contract. I'm going to buy this home over here, and seller says, Yep, I'll accept your offer, and you're gonna put$1,000 down or$2,500 down or$5,000. In some cases, I think the higher the earnest money maybe uh shows that you're a little bit more serious. But let's talk about where that comes in. Uh, when they actually have accepted the purchase contract, both the buyer and the seller have negotiated and the contract terms are actually accepted. There's a window of time that that earnest money actually has to be delivered. Now it's going to be held in one of two places. Either at the title company that the transaction was assigned to, or it's held at the broker's office. Either way, it sits in a trust account. And if you want to know how strict trust accounts are, that money just sits. It can't be invested anywhere, it can't make any income. It is simply just a holding account, that trust account. Um, trust or uh earnest money is a little bit confusing for people, and they don't some people who are ready to purchase a home, they're not uh aware that this is something that they need to be prepared for. Earnest money is a requirement in most cases. Obviously, there is a way to have it waived. Um, maybe we do transactions with family members, we do transactions with super good friends, and they don't have earnest money because it's like a kind of a little bit different concept. But earnest money is definitely needed in a contract that maybe they don't have a family or friendship connection to. Um, where where does it go? It actually uh goes towards whatever you owe at the time of closing when you make it to closing. Now let's talk about before if something happens. The earnest money sits there, you go through your inspection period, you go through the appraisal process, you actually have an underwriter to do the underwrit of the loan and all of that stuff. If everything goes through smoothly, there is no issues, you get to closing, what you've put into earnest money, as long as it's documented that came from a source that we can use, you know, not like your credit card transaction, that's actually going to be credited toward your towards your transaction at closing. Now, about a week before you go to closing, if you're like, yeah, I just don't want to do this, I just don't want to do this. I don't, I decide I don't want to buy the house. Technically, the seller has rights to just keep that earnest money. It's kind of their their uh reimbursement for taking the home off the market. And that is definitely something that is controversial in certain ways. The frustration I have is when real estate agents uh I've had this happen a lot. Uh real estate agents will call and say, Oh, my buyer just can't do this. They they're just super nervous. Like, I don't have any way to decline the loan. I I they're qualified. I've put it through underwriting, they've given me the documentation enough that I need to do or that I can do the loan. Well, is it can you figure out how to just decline it? No, I can't. I'm not gonna do that. I send out a commitment letter that said, yep, this loan is good. And the other party and the seller is trusting that my letter was right. So, no, I'm not just gonna figure out how to decline it. Well, if the buyer doesn't give you the rest of the documentation, that that's because they didn't perform to get that. That's not because I denied their loan. I can sit here for 120 days and wait for that paperwork to get to me, and then I close out the file for incompleteness. So it's not a denial. Anyways, I only had one situation, and it was a long time ago that I issued a denial letter on a file because the borrower just couldn't handle it, and that was that was a saved my bacon on the home. The home should have been condemned. We got the appraisal back and the inspection was done, and we were past the window of time to get ourselves out of things, and it was a bad, bad, bad gig, but somehow the appraiser in the world's ruin cahoots, and that apprah that oh I have PTSD from thinking about that. Anyways, I will not issue a denial letter just to save somebody's earnest money. Earnest money is protected a couple of different ways on its own. You have the window of time for an inspection, and it doesn't matter what that looks like. You can hire a third-party person to come in and do the work or to do the inspection. You can hire your buddy that's a contractor to go in there. You can go in as yourself and turn on every light, check for moisture, watch the water run and everything and make sure everything's okay. That window of time of inspection is not defined by having to have a third party in there. When that window of time is up, though, you have to say, hey, seller, yep, we're gonna accept this house because we've done our inspections, or here, seller, we want you to do X, Y, Z to the house, or you're willing to do it, and they say yes or no. Or in the fact that they um they don't want to do the work, but they'll give you a credit or something like that. Now, once you've signed off on that inspection, that earnest money is no longer protected by the inspection side. Now, fast forward and we get the appraisal done, and say we're buying a house for$300,000 and the value comes in at$275,000, seller won't come down to$275, you really as a consumer don't need to buy a house$25,000 higher than what the value of it is, and the contract dies at that point, and you get your earnest money back. That's not even a question because the contract fell apart. If for some reason you lose your job, uh change of employment, something happens in the loan uh that's kind of out of the lender's control, and we can't recover from that, your earnest money is protected that way too. But just for me as a lender to decline the loan just so you can get earnest money back, no, I won't do that. I won't do that. I just think that's really shady. And lenders who are doing that, unfortunately, that's just not good. Just not good at all. Um, so uh the as we talk about um earnest money getting deposited into a title company's trust account, uh let's pull in what an escrow account or an escrow uh company is for and then define escrow. There's two different explanations of escrow. What I don't understand in in the Webster's dictionary, there's thousands and thousands and thousands and thousands of words. I don't know why we had to use the word escrow twice in the same type of of uh of transaction, of whatever the word is. So we have escrow, which is actually the section of the title company who closes the loan. The escrow officer is the one that sits with the client and the seller and signs all the paperwork with them. Uh we always have referred to them as a disinterested third party, but they are interested. You know, they're they're ensuring that that loan is going to uh have first-liened position, they're insuring a lot of little things, so they are interested. So I don't know what the right terminology is. They're part of our team. I love our escrow officers. There are a couple that uh are more difficult than others, but we we love our escrow's or our escrow people. The other escrow is your taxes and insurance sitting in an escrow account. So basically, each month you're making your mortgage payment. If you have an escrow account on your mortgage payment, a chunk of that payment is going into an escrow account so that insurance and taxes can be paid out when they come due. And in Idaho, taxes are paid twice a year. In insurance, obviously, is one year uh at a time. So an escrow officer, escrow portion of the title company, they sign the papers, and then we have the escrow account that keeps track of the taxes and home insurance so that those payments can be paid uh when they come due. Like I said, there's a lot of words out there. I'm not exactly sure why we had to use the same word with two different um definitions, but I guess if you think about the English language and how clunky the English language is, people say you have the same word that meets five different things, or you have sell, sell, and sell, and they're all spelled different and they mean something different. And anyways, there's a there's a little rant. Um, let's talk about what the title companies do with your money, with money. The title company, escrow company, they actually receive the wire. So after the loan documents are all signed and we have everything balanced and we know what dollars need to come to the title company, the title company actually is the one that disperses the money. So we buy a house for$300,000 and however much money the the buyer needs to bring in, and all that, the lending institution is going to wire the money to the title company, and the title company disperses from there. Based off the closing statement, paying off the mortgages that the seller had, we are paying whatever you know, home insurance up front, paying the appraiser possibly, um, paying any of the extra bills that are out there if the seller had to have any extra inspections, and then paying out the difference of what the seller is owed off of the equity side of things. The title company is the one that disperses the funds, and they are ultimately in charge of recording the loan after the wires received and disbursement. So that is where they come into play with the money side of it. Um they'll take care of like on a refinance, they'll take care of paying off any liens or payoffs or yeah, like mortgage payoffs, they'll take care of all of that. Same with the purchase. If there's any liens or judgments or anything, they'll just make sure that those are paid off based off of whoever the party is that is owed that. Um, so how how the funds are calculated at the time of closing is kind of an interesting thing. It's a lot of numbers, but it's really basic math. I owe this much to the seller, I put this much down in earnest money, I have this much in closing fees, I have this many in credits, and it's all calculated on the seller side and the buyer side separately. So you'll see on the buyer side it says, hey, here's your purchase price, here's what your closing costs are, this is how much we need to close the loan. So let's just say our purchase price is$300,000 and closing costs are$10,000. So I need$310,000 to get this transaction to just shut down. And then we go down and we start seeing what the credits do. What is our loan amount? What did I put down as earnest money? What do I have as a tax probation credit? Because the seller is responsible for taxes for the time being up to when you actually take over as a consumer, as a new buyer, and then um, like a title insurance credit, credits that come in for water dues or um uh any of those kind of things that are like credits because the seller is not responsible or the buyer's not responsible for paying them why the seller still owns the home, but they'll come due, so we had to collect for them, and so there's those credits, and by the time you get all that calculation done, this is how much you owe buyer at the time of closing. On the seller side, it says, Hey, you're getting three hundred thousand dollars worth of a purchase price, and then come down here a little ways. You owe this on your mortgage, you chose to pay five thousand dollars in the buyer's closing fees, that's going to transfer to the buyer's side, and then also the tax preparation shows as a debit from the seller's side and a credit to the buyer's side. The title insurance shows as a debit from the seller to the credit of the buyer, and then the bottom line of after all those um ins and outs happen, the uh debits and credits, then okay, everything's cleaned up on title. Hey, seller, here's your 20 grand after 300,000 goes towards all of these things. Title Company disperses those funds. That's what the title company's job is. Um, let's talk about uh uh money. When we're talking about money on side of things, what is not acceptable as money? Um, credit card advances, that's a no. Uh cash is definitely not king. We do not want to have we don't want to cash at all. And I think it's really sad because cash is cash, but once again, the bad apples have made it bad. Somebody has printed money in the basement, somebody has sold drugs to the kids on the corners, uh, we can't document where the cash came from. So everybody is guilty until proven innocent in the mortgage industry. Straight up, that's what it is. Everybody's assumed to have done something really bad, and we have to be able to prove that they didn't. And I I would like somebody to be able to argue with that. I just don't think you can. So you are guilty till proven innocent when it comes to a mortgage loan, and it's our job to make sure that we have documented everything that we can for an underwriter to be happy. Um what does what is okay, you know, gift funds, drawing off 401ks, savings accounts, checking accounts, uh you get your paycheck, actually tangible paycheck, and you go cash it, and we can talk about um like this paycheck actually turned into cash and you put it into a cashier's check. Sure, we can pay per trail that. I don't know why you do that. That was a really stupid idea. That was a stupid example. Um what else can be okay? Um, yeah, I think that pretty much covers it. Cash is not king. That's the big thing about it. Cash is not king when it comes to actually doing a home loan. Cash is king if you have to buy a home on foreclosure, cash is king if you are in a bidding war and you're going up against a loan and you have the ability to pay cash for a house. That's that's good. Uh, but the definition of cash is just a little bit differently. Most of the time, people have like a HELOC that they pull from, or they literally have$300,000 in their bank account that they could go get a wire or some sort of a cashier's check to take to the title company. Um, so on the the movement of the money, your earnest money's been sitting in the trust account. The loan amount comes in as a wire from the lender. Uh, the type the title company receives the funds that the buyer has to bring in. Very rarely, but sometimes sellers have to bring money. They pull all that money together and make sure that they have all the money for all the transaction to be able to balance, and then they disperse it out. And um, that is definitely an interesting process now. Uh year just recently, we have now funders at the title company. The escrow officer used to have the ability to close the loan with the client, get the monies from the lender, and then disperse it and record it. Now there's actually a funder involved, and they have the the uh responsibility of checks and balances and making sure everything's good that way. Once again, the bad apples made it bad. So we have to have somebody in a seat to protect everybody from from being shady. It's just unfortunate how many other checks and balances have had to come into play over the years just based off of uh unethical things and unethical and unethical people. Um the thing that we have to remember about earnest money is earnest money goes towards the transaction. So yes, it could be part of your down payment, yes, it could go towards closing fees, the lender never gets it. Uh it's not something that will ever cross the lender's hands. And uh it and it's it's could be lost. So be careful when you are uh in a transaction. Both both parties, you know, making sure that that earnest money that is put down is protected, you're doing your inspections and investigative work on the home within the window of time so you don't lose it. Um make sure you've gone in with your eyes wide open and making sure that this home is really what you want to buy, so that you don't have any type of buyer's remorse or you lose that earnest money because they just decide to bail at the end. So my recommendation if you have any money that you plan on doing anything with with a home loan, uh mattress money, uh money in a jar, envelope, whatever your concept is, um, I would just be opening a separate bank account that you really don't have access to and just dump that extra money into your bank account as you go so it just grows because we would need to be able to pay-per-trail that coming out for earnest money or the down payment or whatever amount of money you're bringing to the closing table for closing costs and the down payment. Um, so with that, uh let's uh let's end here, and I am just grateful for uh you listening and uh let me know if you have any money questions. Like what part of this money will work and what part of this money won't. I'm definitely here to be able to help you out. So, Deborah Mortgage Queen, I'm out. Have a good day. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.