As a first-time homebuyer, I was told an escrow account was set up for me. That’s about as far as my knowledge of escrow accounts went—I had one. So, before we start talking about what makes up a 203k Loan Escrow Account, let’s establish what an escrow account is and what it isn’t.
An escrow account is created for you by your lender (mortgage company or bank). You, the borrower, pay into this account monthly to cover the annual property taxes and insurance premiums. We’ve all heard the saying, “In this world nothing can be said to be certain, except death and taxes.” We can all agree with Benjamin Franklin (did you know he is the one who said this?) on this one, luckily the escrow account is a provision to ensure that your property taxes will be covered and you aren’t hit with an unexpected, mandatory payment. An escrow account is not a savings account that you, the homeowner, can pull from if your roof starts to leak or you decide you want to add a gazebo in the back.
When it comes to a 203k Loan and that escrow account, it is similar in that the account is set up by your lender and the monies deposited are controlled by them. But where it differs is how the money is used. The 203k Loan covers the cost of repairs/upgrades as well as the purchase price of the home; following the closing, the purchase price is paid to the seller and the renovations begin. The contractor is paid from the escrow account through draws, authorized by your lender. It is the responsibility of the mortgage banker/lender to keep an account of escrow funds and disbursements. Once the work is complete on the house and the contractor is fully paid, any remaining funds in the escrow account are used to reduce your mortgage principal.
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