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Understanding the Escrow Process

by Shannon Whyte
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Buying or selling a home involves multiple steps. One aspect that many buyers (and even sellers) find confusing is the escrow process. 

The escrow process begins when a buyer’s offer on a house is accepted. It ends at closing. The exact amount of time can vary, although it typically lasts between 30 and 60 days. 

Escrow is important because it helps protect both the buyer and the seller in case one of the groups doesn’t complete their part of the agreement. Fortunately, this stage is easier to navigate once you understand the purpose and what happens during the escrow process.

What is the purpose of escrow?

For most people, buying a home is one of the biggest financial purchases they’ll make. In addition to the amount of money exchanging hands, buying a home involves a significant amount of paperwork. 

The escrow process involves selecting a neutral third party, often called an escrow agent or officer, to help oversee and ensure a smooth transaction per the sales agreement. In a real estate deal, the escrow agent serves as a kind of mediator. They safely hold all assets (money and property) in escrow until both parties agree that the contract conditions are met and paperwork has been completed correctly. 

Who is involved in the escrow process?

Multiple people play a role in the escrow process, including the escrow agent, buyer, seller, and buyer’s lender. The buyer’s and seller’s real estate agents are also generally available to act as knowledgeable points of contact between their clients and the other parties involved in their side of the transaction.

The escrow agent can be an individual, like an attorney, or an organization, like a title company or real estate closing company. Once you enter escrow, the agent will collect the escrow deposit and begin ordering and preparing title reports, the property deed, and more.

What happens during escrow?

Escrow involves multiple steps. As stated by Steve Dawson, Chief Compliance Officer at REX, “Escrows have a lot of moving parts. There are a lot of different professionals involved.” Fortunately, whether you’re the buyer or seller, you’ll have experts, including your real estate agent and escrow team, helping you navigate escrow.

Here are the steps commonly involved in the escrow process, although the exact order may vary depending on your location.

1. The buyer submits an escrow deposit after the seller accepts the buyer’s offer and an escrow account is opened.

The escrow deposit (also called earnest money deposit) is a good faith deposit that shows the buyer is serious about buying the home. 

This deposit is usually collected by your real estate agent and placed into an escrow account that the escrow agent manages. The seller doesn’t receive this money. The escrow account also will contain the necessary documents for the transaction, like the loan paperwork and deed, until the sale is final.

2. The buyer’s lender conducts a home appraisal.

The buyer’s lender will appraise the house to ensure its value is worth the applied mortgage. If the home appraises at less than the selling price, the lender may not provide the full financing. At this point, the buyer can have another lender appraise the home, pay the difference, or discuss with the bank why the home is worth more than the appraisal. 

If the home appraises at the sale price or higher, the buyer will be able to secure the mortgage.

3. Financing is reviewed, and a good faith estimate is prepared.

Even if the buyer is pre-approved for a loan, the lender will prepare a good faith estimate that details the loan amount, monthly payments, interest rates, and closing costs. A prospective lender must provide this document upon the buyer’s request to allow them to compare and select the loan with the lowest costs.

4. Disclosures are delivered.

During escrow, there are three main groups of disclosures that must be distributed to the buyer and seller. 

  • Seller disclosures. The seller creates a report that details the property’s appliances; water, electrical, and HVAC systems; and any known problems or past insurance claims. This report is sent from the seller to the buyer through their respective agents. 
  • Local disclosures. The buyer will receive information containing local advisories and notices, such as any environmental issues. This information will also contain information about local ordinances and zoning that impact the property. The information varies based on the city, county, and state where the home is located.
  • Agency disclosures. Both the buyer and seller will receive an explanation of their agent’s duties, compensation, and responsibilities while acting as their representative during the real estate transaction. The specific responsibilities will differ somewhat depending on the buy or sell side, but agents must generally agree to act in the sole best interest of their client during the negotiation and execution of the purchase contract.

5. Inspections are completed.

During escrow, all required inspections of the home are completed. These inspections may vary based on the lender requirements. That said, the most standard inspections include:

  • Certified home inspection. A certified inspector will go through the house to assess for problems that need to be fixed. If significant issues are found, the buyer can back out of the deal, request the seller pay to fix the issues, or request a seller’s credit. 
  • Pest inspection. A pest specialist will inspect the home for pests such as termites or carpenter ants. This inspection is required in some states and is optional in others.

6. Title search and report are completed.

A title search checks to ensure there aren’t any problems with the house’s title. The title report will indicate the lawful owner’s information and any liens (or debts) on the property like unpaid taxes or bills. Typically, a title company is hired to review the records and ensure the seller legally owns the property with no encumbrances. 

7. Insurances are secured.

The type of insurance required by buyers may vary based on the home’s location. For example, many buyers must purchase homeowner’s insurance, which covers the cost of repairs or rebuilding if the home or your items are damaged or destroyed. Additionally, you may need other insurances such as flood, hurricane, or earthquake.

Title insurance is also needed. This insurance protects the buyer if something is overlooked during the title search process.

8. Contingency removal and final walkthrough are performed before closing day.

As the closing deadline approaches, the buyer will remove the contingencies stated in the contract, such as the title, inspections, and loan contingencies. 

The final walkthrough is typically conducted within 24 hours before the closing meeting. During the walkthrough, the buyer inspects the home to ensure the house’s condition is consistent with the contract agreements.

9. Review the HUD Form and attend the closing meeting.

The buyer will receive a HUD Form that shows all the loan terms and closing costs. This document should be reviewed carefully and be compared to the good faith estimate provided earlier in the escrow process. 

Lastly, during the closing meeting, the buyer and seller will need to sign various documents. All payments required at that point will need to be made, and the keys will be turned over. Once the closing meeting is completed, the escrow process is done and the title is transferred to the buyer.

Understanding who is responsible for what during escrow

While the escrow process involves multiple steps, knowing what you’re responsible for can help simplify the process. Whether you’re buying or selling, you’ll also have experts to help you through escrow to ensure everything is completed correctly and on time.

What are the seller’s responsibilities during escrow?

While some responsibilities may vary based on your location, the seller may be required to:

  • Provide any loan paperwork if applicable
  • Reach an agreement with the buyer over any concerns found in the home inspection
  • Provide information on property taxes, insurance, and homeowner’s fees
  • Complete the seller’s disclosure
  • Respond to any title issues if they arise
  • Make your house available for any home inspections and appraisals

What are the buyer’s responsibilities during escrow?

During escrow, the buyer is typically required to:

  • Arranging for the home inspection
  • Reviewing the home inspection report and negotiating any repairs or compensation with the seller if necessary
  • Providing paperwork needed to secure a mortgage
  • Obtaining homeowner’s insurance and delivering it to the lender
  • Requesting an estimated closing statement
  • Stating how the title will be held, such as tenants in common, joint tenancy with right of survivorship, living trust, community property, or sole ownership

Understanding what happens during the escrow process will make your closing smoother

While the escrow process takes time, it helps ensure the transfer of the house from the seller to the buyer goes smoothly and adheres to the contract’s terms. Fortunately, you’ll have professionals available to help you through the different steps whether you’re the buyer or seller.

When going through escrow, ask questions if you don’t understand a document or a requirement. You’ll also want to have all your financial documents to avoid delays and ensure a smooth process.Our experts at REX can help guide you successfully through the escrow process. Our team provides in-house title and escrow services, so you have a smooth close with no unnecessary delays. REX can also help you with your insurance needs and home services like moving, inspections, and repairs. With REX, you’ll have everything you need, whether you’re buying, selling, or both.

Interested in buying or selling a home? We would love to help!

Give us a call at 855-205-0599.

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