Buying a house can be a complicated process, one that most people are relatively unprepared for and do not completely understand. Within the stages of buying and selling a home—from the offer, to the home inspection, and getting that mortgage approval—are other actions that must occur in a certain order to become legal and final.
One of those hard-to-understand elements is the process of being in escrow, which occurs between the time a seller accepts the offer and the buyer receives the keys to the new house. Understanding the purpose of an escrow and how the escrow works will help make the process of buying a home seem less intimidating. Basically, an escrow is used for the protection of all the parties involved in the real estate transaction. For most, the purchase of a home will be the single biggest purchase of their lifetime.
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.
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.
Escrow Process in a Nutshell
The lender will do their own appraisal to ensure that the agreed upon purchase price is not higher than the home value.
You may already be pre-approved or pre-qualified for a loan; however, once you have decided on a specific property the lender will prepare a “good faith estimate” that details the loan amount, monthly payments, interest rate, and closing costs.
The seller must provide you with a written list of any known problems with the home.
You will need to have a certified home inspection as well as other inspections that are required by the lender such as a pest inspection or a flood inspection.
Your lender will require you to provide proof of homeowners insurance. You may also need additional insurance, such as flood, earthquake, or hurricane insurance depending on where the home is located.
- Title Report/Insurance
The seller must have a clear and unencumbered title to the home in order to sell it to you. A title report looks for things such as liens that would prevent a clear title. You may also need to purchase title insurance. Title insurance protects you if something is overlooked during the title search.
- Final Walk Through
This is done to make sure nothing has changed since you made the purchase offer and those items such as appliances or window treatments are left behind if they are part of the purchase agreement.
- Close Escrow
This is when you close on the home. You will sign lots of documents and will likely need to pay costs related to the sale other than the purchase price. The lender will transfer the remaining purchase money and your escrow funds will be released by the escrow agent and applied to the purchase price.
What to Expect in the Opening Process
Once the buyer and seller agree on a price and sign a mutually acceptable purchase agreement, the real estate agent will collect your earnest money and is deposited into an escrow account. This acts as a good faith deposit which is ultimately applied to your down payment
An escrow account is managed by an outside party on behalf of two agreeing parties until specified conditions are met during a financial transaction. The escrow company acts as a neutral third party to collect the required funds and documents involved in the closing process, including the initial earnest money check, the loan documents, and the signed deed.
What to Expect from the Title Company
The title company needs to verify that the person who is selling the home is the person who legally owns it and whether or not there are any liens against the property. The title company will issue a Preliminary Title Report (PR), which the escrow company will then review, send out to the clients to be approved, send copies to agents and lenders, and discuss any potential issues with all involved parties.
- Contract Signed by Buyer and Seller
When the contract for purchase and sale has been signed by both buyer and seller, the real estate agent, or one of the parties if no agent is involved, submits the contract and earnest money check to a title company.
- Title Company Receipt
The title company issues a receipt and sends a copy of the contract and the check to each party. The process of setting up a working file for the transaction is often called “opening title” and is the first step in the title company’s work to close the sale and issue a policy.
The closer communicates with the buyer, seller and lender and request a survey if one is required, requests tax statements, gathers the required documents, prepares a settlement statement and conducts the closing. The closing is simply the meeting where the transfer and loan documents are signed by each party.
- Closing Documents
Typically, the closing documents, which include the settlement statement, the deed and all loan documents, are not prepared until immediately before the closing. It is very important that you review all closing documents before the closing.
- Settlement Statement
A settlement statement is a document that summarizes the terms and conditions of a settlement, most commonly a loan agreement. A loan settlement statement provides full disclosure of a loan’s terms, but most importantly it details all of the fees and charges that a borrower must pay extraneously from a loan’s interest. Different types of loans can have varying requirements for settlement statement documentation. Generally, loan settlement statements can also be referred to as closing statements.
Remember that the title company does not represent the buyer or seller, but rather acts as an escrow agent, holding the earnest money and documents in escrow until it is required to disburse the funds according to the terms of the contract. Sometimes the title company is involved in the disbursement of funds as well. There are instances when a lender will provide the agreed-upon loan to the title company instead of directly to the borrower which often happens when the settlement statement include additional parties besides the borrower who are also entitled to payment.
If either the buyer or seller thinks he is entitled to the earnest money prior to closing, he may send a request for release of the earnest money to the other party. If the other party signs the request, the title company will send the earnest money to the party requesting it.
What to Expect from the Lender
The escrow holder will need all information on the lender as soon as possible. This includes their address, email address, phone number, and the name of the loan rep. The escrow officer will send the lender certified copies of all escrow instructions, the PR, certified copy of deposit funds, a purchase contract including escrow acknowledgment, and opening escrow and title fees.
- Await the Lender’s Appraisal
The bank or other lender providing your mortgage will do its own appraisal of the property (which the buyer, usually pays for) to protect its financial interests in case it ever needs to foreclose on the property. If the appraisal comes in lower than the offered price, the lender will not give you financing unless you are willing to come up with cash for the difference or the seller lowers the price to the appraised amount.
- Secure Financing
You should have already been pre-approved for a mortgage at the time your purchase agreement was accepted. Once you give your lender the property address, it will prepare a good faith estimate or a statement detailing your loan amount, interest rate, closing costs, and other costs associated with the purchase. You may want to negotiate the numbers on this document before you sign it.
Why Choose Citrus Heritage Escrow?
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