What You Need to Know Before Buying a House: Home Buying 110
Updated: Jun 3, 2023
*Not financial advice - your money, your choice*
Apologies for being a little late on this post, I was busy playing in the snow with my friends instead of working on Sunday. :)
Read Home Buying 101 first! If you haven't yet, click here.
Have you ever heard grown-ups talking about buying or selling a house and wondered what they mean by "escrow" and "under contract"? Well, let's break it down in a way that even a third-grader can understand!
When someone wants to buy a house, they usually need to borrow money from a bank or lender. But before the bank gives them the money, they want to make sure everything is okay with the house. That's where being "under contract" comes in. This basically means that the buyer and seller have agreed on a price and the terms of the sale.
Once the buyer and seller agree on the price, they sign a contract that outlines everything, like the closing date and any repairs the seller has to make.
From here, the house goes into escrow.
Visual from Napkin Finance
As an example of escrow… imagine you’re at a candy store and you see a Nutella snack pack with pretzel sticks that you really, really want. You don’t have enough money to buy it right away, so you ask your mom if you can borrow some money. But your mom is a smart cookie. She says you can’t just take the money and run off with the snack pack. She wants to make sure that the thing is worth the money and isn’t expired.
That’s where escrow comes in! Escrow is like a grown-up version of your mom. It helps the buyer (you) and the seller (the store) make sure that everything is okay before the sale is final. The store puts the snack pack in escrow, and you put some money into an escrow account.
Your mom wants to make sure the snack pack is in good condition so she sniffs it, looks at the expiration date, and even asks the store to run some tests. This is like the due-diligence period when the seller (the store) has to make sure the house (the snack pack) is in good condition.
At this phase, you can also get an independent inspector (your dad) to run some tests on the snack pack as well.
If everything looks good, you get the snack pack, and the store gets the money from the escrow account. But if something is wrong with the snack pack, like the pretzels are stale or the Nutella has a hair in it, you and your mom might have to talk to the store to figure out a new price or terms for the sale (or walk away).
The TLDR of it is that escrow is like having your mom check the snack pack before you buy it! It’s a great way to make sure you don’t waste your money on something yucky or expired and if something is wrong, you can always negotiate a better price!
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