The Escrow Process: Simplified
Buyer and seller have signed a mutually acceptable purchase agreement and it’s time to open escrow. What is escrow exactly? Simply defined, escrow is a deposit of funds, a deed or other instruments by one party for the delivery to another party upon completion of particular conditions and events. Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until all of the instructions in the transaction have been followed. The escrow holder is the independent third party hired to safeguard the funds and documents, and to disburse funds and convey title only when all parties’ contingencies and conditions have been met.
To open escrow, the buyer will provide the earnest money check to be deposited into an escrow account at the escrow company specified in the purchase agreement.
Here are a few integral steps within the escrow process:
1) Home Appraisal
The lending entity requires that the home be appraised to protect its financial interest. If the appraisal comes in lower than the agreed upon price, the lender won’t loan above the appraised value and closing can be in jeopardy unless buyer comes up with more money down, or the seller agrees to lower the price.
Buyer should have been preapproved for a mortgage at the time of negotiations. Once in escrow, the lender will provide a detailed statement on the loan amount, interest rate, closing costs and other costs associated with the purchase. The statement needs to be reviewed carefully and some terms can be additionally negotiated. Once the buyer signs the loan commitment, then the financing contingency can be removed.
3) Disclosures Approval
Sellers will provide during the escrow period written notification of any obvious problems with the home as previously identified by seller and seller’s agent. Buyers are to review the disclosures carefully and acknowledge via signature that they have been made aware of the issues.
4) Inspections Completion
There are several inspections to complete during the escrow period:
- Home Inspection – it is in everybody’s best interest to complete a home inspection so that any costly or dangerous defects in the home are brought to light. Buyer can ask sellers to fix some of the issues or ask for a reduction in price so the buyer can self-remediate. When the process concludes satisfactorily, buyer will need to remove the inspection contingency in writing (removal of contingency occurs after any inspection.)
- Pest Inspection – in California, lenders require a pest inspection to determine if the house has termites, carpenter ants or other pests that can be detrimental to the health of the home. Pest problems need to be rectified before the house can close.
- Environment Inspection – depending on the house, an environmental inspection might be necessary to look for mold, asbestos and other toxins.
- Other Inspections – home subject to earthquake might be subjected to a geological inspection while some homes in flood areas require a flood report. These inspection reports may impact the buyer’s ability to obtain homeowners insurance, which in turn impacts financing.
5) Home Insurance
Lenders require buyers to obtain homeowner insurance until the mortgage is paid off. Remember to shop around as insurance agencies offer varying coverage and rates.
6) Title Clearance
Lenders also require a title report on the property to make sure the property is clear, that there aren’t any liens on the property and that no one but the seller has a claim to any part of it.
It’s a good idea to re-inspect the property just before closing to make sure that no additional damage has taken place during escrow and that the sellers left behind all the specified items as agreed upon in the purchase contract, such as appliances, fixtures, etc.
8) Final Statement Review
A day before closing or so, buyers will receive a HUD-1 form, or the final statement of loan terms and closing costs. Document should be carefully reviewed for unnecessary, unexpected or excessive fees, as well as any mistakes.
After all these various provisions are attended to and paperwork signed, the escrow officer prepares a deed with the buyer’s name and sends it to the county recorder. Buyer’s check for the down payment and closing costs is deposited into the escrow account along side the loan funds from the lender. Escrow pays out to the seller, and escrow closes. The home has now changed hands.
This multi-layered process should be meticulously overseen by your real estate agent. There are several parties to manage, contingency dates to track, paperwork to execute and more, making the escrow process somewhat tedious and complicated. But your real estate has the advantage of participating in these transactions frequently and should be able to provide value and ease throughout the process.