Escrow Accounts. Escrow accounts help protect the lender: (Select the best answer below.)
A from loss due to an insurance peril reducing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent property taxes.
B from gaining money due to an insurance peril reducing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent property taxes.
C from loss due to an insurance peril reducing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent income taxes.
D from loss due to an insurance peril increasing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent property taxes.
The correct answer and explanation is:
The correct answer is: A. from loss due to an insurance peril reducing the value of the home and pushing the borrower to default and also keeps the property from being seized for delinquent property taxes.
Explanation:
An escrow account is a financial arrangement used in real estate transactions to protect both the borrower and the lender. When a borrower takes out a mortgage loan, the lender often requires the borrower to pay a portion of their property taxes, homeowner’s insurance, and sometimes other obligations (such as flood insurance or private mortgage insurance) into an escrow account. The lender holds these funds in the escrow account and uses them to pay the relevant expenses on behalf of the borrower when they are due.
The primary purpose of an escrow account is to ensure that the borrower remains in good standing by making timely payments on critical insurance and tax obligations. If the borrower were to default on these payments, it could have serious consequences for both the borrower and the lender. For example:
- Insurance: If a property suffers damage due to an insured peril (such as a fire, storm, or other disaster), the home may lose value. In cases where the insurance coverage is insufficient or the borrower fails to maintain insurance, the lender may not recover the full value of the home if it were to be sold in foreclosure. Escrow accounts help mitigate this risk by ensuring that the borrower maintains adequate insurance.
- Property Taxes: Property taxes are a priority lien against the property. If taxes are not paid, the property can be seized by the government. By holding tax payments in escrow, the lender ensures that property taxes are paid on time, which helps prevent the property from being seized for delinquent taxes.
By managing these critical expenses through an escrow account, the lender is better protected from the risk of loss due to unpaid taxes or inadequate insurance.