Escrow is an important phase in the home buying process. Escrow exists to protect both buyers and sellers throughout the process and ensures a smooth and secure closing. Buyers and sellers should actively participate in the process, communicate with their escrow officer, and be prepared to address any issues that may arise.

With the right preparation, navigating the escrow timeline can be a seamless and rewarding experience. Read on to understand the process from start to finish.

 

What Is Escrow?

Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.

 

How Does An Escrow Account Work?

Escrow accounts are a part of the mortgage process homebuyers typically cannot avoid. With mortgages, home buyers typically pay a little extra into an escrow account every month, along with their home loan payments.

While a mortgage holder (most typically a bank) collects the principal and interest payments each month, they also can collect homeowner’s insurance payments and property taxes. They will then pay those bills when they come due. They do this because when you borrow money from a lender to finance your home purchase, the property becomes the collateral for your loan. Your lender needs to know that the property is adequately insured so that it can be repaired or replaced if damaged. Likewise, they want to prevent a tax lien being placed on the property if you neglect to pay taxes.

 

Types of Escrow Accounts

 There are two different types of escrow accounts during the home buying process:

  • Home Buyers Escrow Account

This account holds a buyer’s earnest money that the seller receives once the purchase contract is signed or if the buyer cancels the transaction. The buyer can receive a refund under select contingencies, including not passing a property appraisal, title issues or the seller changing their mind about the sale.

  • Homeowners Escrow Account

In addition to the principal and interest payment, your mortgage servicer collects homeowners’ insurance, property tax and any mortgage insurance premiums for the loan’s duration.

 

When Does Escrow Start?

The escrow process begins when a seller accepts a buyer’s offer to purchase a home, signs the purchase agreement, and an escrow account is opened. Home buyers often back their offer up with an earnest money deposit to show they’re serious about following through with the purchase. The funds are put into the escrow account, where they remain until closing, after which they are disbursed.

 

How Long Does the Escrow Process Take?

There is no standard timeline the escrow process needs to follow. The amount of time it takes to finish the process depends on how long it takes for the buyer to seek mortgage pre-approval (unless they sought pre-approval before they made an offer) and to secure financing. How long it takes for all parties to gather the proper documents can also vary.

If all goes well, it can take as little as 30 days to complete the escrow process, but it is also common for the process to take around 60 days to complete.

 

Is Escrow Required?

Depending on the type of loan and its specifics, you might not have the option to forgo an escrow account. If you are obtaining a conventional mortgage — that is, one from a private bank or lender — an escrow account is often required with a down payment of less than the standard 20 percent, as is mortgage insurance. You often do not have a choice if you are getting a federally backed loan, either. FHA loans and USDA loans require escrow accounts, though VA loans do not.

 

What to Expect During the Escrow Process

There are several steps in the escrow process and in some cases, depending on how much money you’re putting down on a home, escrow may not be required at all. Here is what to expect in the escrow process.

 

  1. Opening An Escrow Account

The first step is to open an escrow account, which is usually done by the seller, but can also be done by the buyer. Opening escrow involves submitting the purchase agreement and any initial deposits to the escrow officer. The escrow officer verifies the accuracy of the contract, ensures all necessary signatures are in place, and initiates the escrow process. During this stage, it is crucial for all parties to review the terms of the purchase agreement carefully, as they form the foundation for the entire escrow process.

 

  1. Appraisal and Home Inspection

Once escrow is open, the buyer enters the contingency period, which typically lasts for a specified number of days as specified in the purchase agreement. During this crucial phase, the buyer has the opportunity to conduct inspections, investigations, and due diligence on the property to ensure it meets their expectations and standards. Your mortgage lender will order an appraisal of the home.

The buyer also has the option to hire a home inspector to carefully evaluate the home and its habitability. It is an important step in the escrow process that allows homebuyers to get a deeper look at the condition of the property, including its structural integrity, electrical and plumbing systems, heating system and more.

For sellers, the contingency period can be a waiting game, as they must patiently await the buyer’s completion of inspections and reviews. Sellers should be ready to provide any requested information or documentation to facilitate the buyer’s due diligence.

 

  1. Appraisal and Loan Approval

The mortgage provider will schedule an appraisal during the closing process. This is necessary to secure financing for the property. The appraiser is checking to make sure the property value reflects the offered price. This will ensure the lender is protected in case they were ever to foreclose on the property. If the appraisal comes in too low, buyers have a few options:

  • Find a new lender to work with and schedule another appraisal
  • Renegotiate with the seller to bring down the sale price
  • Back out of the sale and search for a new property
  • Provide the appraiser with additional property information to boost the appraisal value

The next step for buyers is to secure financing with the lender. After the appraisal is complete, lenders will draft a loan commitment that outlines the potential mortgage amount, interest rate, term, and closing costs. Buyers can use this information to negotiate the best rates directly with their lender. Once the statement is agreed upon, the financing contingency can be removed from the purchase agreement.

 

  1. Title Report and Insurance

These are also required by your lender, but again, you would want them anyway. The title report makes sure the title to the property is clear—that is, that there are no liens on the property and no one else but the seller has a claim to any part of it.

Title insurance protects you and the lender from any legal challenges that could arise later if something didn’t show up during the title search.

If there is anything wrong with the title, the seller will need to fix it so the sale can proceed or let you walk away. Depending on where you live, the escrow company and the title company may be one and the same.

 

  1. Final Walkthrough

The final walkthrough is the buyer’s chance to take one final look at the property!

While this step is not obligatory, it is highly advisable. Take a walkthrough of the house to examine whether it is in the same condition as you agreed upon.

Check whether nothing was damaged since your last inspection and if the seller is honoring the terms. At this point, you likely cannot back out of the deal unless you find major damage, but you can possibly get the seller to fix the issues. Typically, the final walkthrough occurs in the 24 hour period prior to closing.

 

  1. Closing

The closing process varies somewhat by state, but basically, you will need to sign a ton of paperwork, which you should take your time with and read carefully. The seller will have papers to sign as well. After all the papers are signed, the escrow officer will prepare a new deed naming you as the property’s owner and send it to the county recorder. You will submit a cashier’s check or arrange a wire transfer to meet the remaining down payment—some of which is covered by your earnest money—and closing costs, and your lender will wire your loan funds to escrow so the seller and, if applicable, the seller’s lender, can be paid.