Buying or selling a home will probably be among the largest financial decisions a person will make in their lifetime. For this reason, it is crucial that you understand all the possible problems that can arise and address whatever possible to ensure a smooth closing process.


What Does “Escrow” Mean?

Escrow is a financial and legal agreement designed to protect Buyers and Sellers in a transaction. For a fee, an independent third party holds payment until everyone fulfills their responsibilities in the transaction.

With an escrow payment, the Seller will only receive the funds when the Buyer has received and accepted the products and/or services that are part of the transaction. However, the Seller knows they will receive payment because the escrow company is holding the funds on their behalf.


How Does Escrow Work?

When you make an offer on a house, the buyer is typically expected to pay earnest money that will be held in an escrow account until both parties negotiate a contract and close the deal. This earnest money gives the seller added assurance that the buyer does not intend to back out of the deal, and it protects them in the event that they do. It also motivates the seller to choose one offer over others.

During the escrow process, the escrow agent will handle the transfer of the property, the exchange of money and any related documents to ensure all parties receive what they are owed. This removes uncertainty over whether either party will be able to fulfill its obligations, and it helps ensure that neither party is favored over the other.


Things That Go Wrong During Escrow

Once your property goes into “escrow” knowing a few situations affecting escrow become important. Some things which challenge successful escrows:


Problems with the Seller

During the escrow problem, one of the most common problems encountered is with the seller’s Title. During the title search, a contractor’s lien, IRS tax lien or a pending lawsuit against the property can affect the ability to sell the house.

Besides liens, problems with the title include questions about ownership. Maybe the seller thinks he can sell it without getting approval from co-owners like a spouse or partner? Or, the property owner is in the name of a trust or a corporation who needs to sell it, not the seller.

It is always best for the seller to discover this problem ahead of time by obtaining a title report when listing the house or applying for a loan using the property as collateral. Read the preliminary title report and if problems exist, the seller will need to fix them.


Problems with the House

During the inspections and appraisals phase of the escrow process, any issues can force the lender to reject the mortgage application. A home inspection involves hiring a certified professional to go through the house from top to bottom. The inspector looks at the foundation, crawl spaces, attic, gutters, roof, and everything in between. The inspector is looking for any sign of problems that may require repairs before the house closes escrow. These issues can include significant termite damage or even a low appraisal. Both of these issues are relatively common and could prove disastrous to a sale in escrow.

An appraisal is a third party valuation of the home. This is a vital step as the lender and buyers want to confirm that the purchase has a minimum value of the purchase price. If the appraisal report reveals a low appraisal amount, a lender may deny the loan since the appraisal does not support the purchase price set on the original escrow contract.

Typically, problems such as termite damage or poor condition of the structure allow buyers to back out of the transaction. Even less serious problems like air conditioning, fireplace, plumbing, or water heater allow the buyer to demand the seller to fix them before proceeding. The seller can either fix all the problems, or can negotiate a price reduction so the buyer fixes them after closing, or the buyer walks away. Those are the only options.


Problems with the Buyer

Good loan officers and agents should caution the buyer not to make any large purchases during the escrow process, to ensure everything goes smoothly. But buyers have been known to make a large purchase (such as a car) while the home is in escrow. This could have disastrous consequences on their eligibility for a loan and cause the house to fall out of escrow.

When buyers apply for a mortgage loan, they list all their debts. The borrowers have been provided a maximum loan amount from the lender based on the borrower’s debt-to-income ratio as this will create an affordability amount for the buyer based on their debt and income. By adding more debt to a formula that has already been determined, the large purchase will very likely increase this ratio, which in many cases will affect the buyer’s initial pre-approval amount. Most of the time, this leads to denial of the mortgage application.


The Buyer No Longer Qualifies for a Loan

Since most homes are bought with a loan from a bank or credit union, it can be that an issue with the financing of the home may arise. For instance, if interest rates rise, borrowers that were pre-approved for a certain amount may no longer be able to afford the monthly payment for that loan amount. In addition, if the buyer loses his/her job the lack of income results in the borrower not qualifying for the mortgage.


Problems with Documents

Errors in documents occur often during the escrow process. Simple errors a misspelled name or error in inputting the address can cause delays. In addition, more serious problems arise like missing pages or an incorrect loan amount.

This type of problem is relatively easy to catch if every piece of paper is thoroughly reviewed by as many people as possible. Double-checking the interest rates, loan and down payment amounts, personal information, and even spelling become very important during escrow.

The law requires borrowers (buyers) to receive Loan Estimate and Closing Disclosure forms at least three days before the closing. Buyers need to devote the time and attention to look at every page to spot any mistakes. The sooner any error is detected, the sooner it can be fixed.


Problems with Cash Flow

Buyers need to check with their bank online or in-person to verify that the correct amount of funds for the closing exist before the closing. A bank transfer to the escrow company requires at least a couple of business days in advance of the closing to arrive on time.

To avoid the issue of cash flow, the buyer should bring a cashier or certified check to the closing. Otherwise, the buyer should make sure a bank transfer arrives a couple of business days in advance of the closing.


Problems with the Walk-Through

Shortly before closing, the buyer does a final walk-through of the house. Any changes since the inspection, like missing appliances, furniture, or fixtures, or any problems that were not fixed as per the agreement, such as damaged walls or ripped up carpeting, could spell disaster for the deal.

The buyer’s agent should attend the final walk-through and will need to contact the listing agent or seller to fix the problems or the closing will not occur.


Problems with the Lender

At times, the lender fails to communicate a problem with mortgage processing. Even knowing the closing date is approaching, lenders can become overworked if the housing market is especially hot during that time. Missing documents, misspellings, information errors caught in time, and resolved means no delays in closing.

Buyers should initiate communication with the lender with enough time before closing to spot and fix problems before the date arrives. A weekly check-in to verify the lender received pending documents until the file is complete can be an important proactive step to avoid issues.

Also, once the lender says everything is in order make sure the escrow officer has received them.



What Happens at Citrus Heritage Escrow?

Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.

During the escrow period, the title company coordinates with Citrus Heritage Escrow and begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.

When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.

Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200