The Escrow Process

Purchasing a property is full of complications that most people do not understand and are unprepared for. One of those mysterious elements is the escrow process which runs from the time of a  “signed around” purchase agreement to the moment the new owner takes possession.

Here is a brief summary:

Open escrow

Once you and the seller have signed a mutually acceptable purchase agreement, your agent will collect your earnest money check and deposit it in the trust account specified in the purchase agreement and open an account a “closing agency” which is typically a local title company.

The closing agency acts as a neutral third party to collect the required funds and documents involved in the closing process such as earnest money, loan documents, title insurance, bank funds, mortgage documents, and the transfer deed.

Secure financing

If you’re not already pre-approved for the loan, it’s time to provide the financial institution everything they require so they conduct final underwriting and prepare a good faith estimate detailing your loan amount, interest rate, closing costs and all other costs associated with the loan.

Once you have a written loan commitment it’s time to remove the financing contingency of the contract.

Conduct necessary inspections

You aren’t required to conduct inspections when you purchase a property, but it’s in your best interest to do so.

A professional home inspector can help determine if there are dangerous or costly defects in the home. In some cases, you may want to get additional inspections to check for pests, water intrusion, radon, mold, electrical systems, roof, lead paint or other environmental hazard. It’s important to uncover any and all issues and understand the costs to remedy so you can ask the seller to fix them or lower the price so you can arrange the repairs yourself.

Once the inspections are satisfactory, you’ll need to remove the inspection contingency in writing.

Await the appraisal

The bank providing the mortgage will order an appraisal of the property to protect its financial interests.

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.

Title Report & Title Insurance

The title company identified in the agreement will search for all recorded documents that may affect the deed to the property. Examples include easements, liens, tax assessments, covenants, conditions and restrictions and homeowner association bylaws. If there is anything wrong with the title (known as a cloud or defect), the seller will need to fix it so the sale can proceed or let you walk away.

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

Both the buyer and lender must review and approve the preliminary title report prior to closing.

Final walk-through

It is a good idea to re-inspect the property just before closing to make sure that no new damage has occurred and everything is as is expected and agreed upon. At this point in the process you probably won’t be able to back out unless something is seriously wrong.

Review the HUD-1 form

At least one day before closing, you will receive an HUD-1 form which will contain a final statement of loan terms and closing costs. Compare it to the good faith estimate you signed earlier.

Closing

Once all of the contingencies of agreement have been met and the preliminary title report has been approved all parties will arrange a time and place to sign all the required documents.  There will likely be a lot of paper to read and you should read everything carefully and ask plenty of questions.

After everything is signed and distributed to all appropriate parties, the funds will be disbursed and the necessary documents will be recorded at the local recorder’s office.

Conclusion

Your agent will assist you greatly during this entire process so don’t be too concerned if you don’t understand every detail. Try not to let the little things bother you and ask lots of questions along the way.  When emotions run high as they often do with real estate transactions, always keep in mind the primary goals you had when you decided to purchase the property.