You’ve found the home of your dreams. You have a preapproval letter from a lender. You’ve put in an offer that’s been accepted. So–pardon the expression–you’re practically home-free, right?
Not exactly. There’s still that one-word process you need to get through: escrow.
It’s easy to define escrow. But reaching close of escrow and having the keys to the front door in your hand depend on many factors.
What is an escrow?
We’ll let Tegan Powell explain. She is Escrow Officer-Branch Manager at Pickford Escrow Company, a HomeServices of America Company, in Mission Viejo.
“In the ‘old days’ of real estate, escrow would just be a safe, independent third party or company that would hold the money so it was only released to the necessary party when the transaction was completed,” she said. “But it has evolved greatly over the years, with more responsibilities for the escrow officer, one of which is drawing instructions reflecting the terms of the buyer and seller.”
In a transaction with lender financing, only when all conditions are met will the lender agree to fund the transaction, Powell said. After the funding takes place, the title company will request for the transfer of ownership to be recorded at the county recorder’s office. Once recording confirmation is received, sale proceeds are released to the seller, and the buyer’s mortgage is in effect.
Who oversees the escrow process?
An escrow officer is assigned to see each transaction through to completion–whether successful or not.
“The escrow officer serves as the communications link, or the hub, for all the parties in a transaction,” Powell said. “There can be between 10 and 15 people involved in a single escrow. They include the buyer, seller, listing agent, selling agent, termite company, lender, title company, insurance agent, homeowners association (HOA), and transaction coordinators within each of those parties.
Who pays the escrow fees?
They are customarily split 50-50 between buyer and seller in Southern California, Powell said. Fee arrangements vary by state, and even regions within states.
What factors are involved during the escrow period?
During an escrow where the buyer is obtaining a loan, the various parties must perform due diligence to assure that all elements of the sales procedure are acceptable so the loan can be funded. These include the home’s appraised value, the buyer’s income and employment history, previous tax returns, and other factors. As many homeowners know, various outcomes can slow or even end the escrow.
“A home not appraising for the purchase price often ties things up,” Powell said. “Let’s say it’s on the market for $750,000 and goes under a contract for that price. Then the appraiser comes out and says it’s worth $735,000. The lender may not lend on a property unless the sales price is reduced. In some cases however, the lender may still be able to move forward if the buyer is able to bring in a larger down payment. A home not appraising correctly can be a factor in a falling out of escrow if the parties aren’t willing or able to reduce the sales price.”
One of the most common reasons for an escrow to cancel is the buyer not being able to obtain financing, even with a pre-approval letter, she said. Lenders tend to be very willing to write a pre-approval letter for a buyer, but when it comes down to it, after the lender performs its thorough loan-approval process, the buyer might not qualify for a loan.
“The buyer doesn’t always find out right away even if they are approved,” Powell said. “Sometimes we won’t get an approval until two full weeks into a transaction.”
Another typical scenario, she said, is when a buyer asks for excessive repairs and the seller is not willing to provide them. The buyer might want all-new windows. But the seller might just say no and go on to a new buyer.
“I’ve even had escrows cancel because there was litigation against the HOA,” Powell said. “One fell out because the buyer was a symphony cellist, but the HOA rules said no instruments were allowed to be played in the home.”
How can buyer and seller help pave the way for a successful escrow?
“Choosing the right team from the start is a big factor,” Powell said. “Buyers should make sure they are using an accredited lender that is savvy and familiar with all the new federal requirements that take effect Oct. 3. (More on those below).
“Berkshire Hathaway HomeServices California Properties agents are the most educated I’ve worked with. We have a great legal department within our company, and prompt support for all escrow matters. Additionally, the Pickford Escrow Company and The Escrow Firm branch managers and escrow officers attend weekly sales meetings that Berkshire Hathaway HomeServices California Properties hold for all agents. We are able to keep them constantly informed of any new regulations, so they can help buyers and sellers make educated decisions moving forward.”
What are the new federal regulations about?
They are mandated through the Consumer Financial Protection Bureau (CFPB), an organization that governs financial institutions, including residential real estate and closing services.
“The new regulations have stricter timelines and stricter disclosure requirements for lenders,” Powell said. “They will affect escrow considerably as well by making it a lot more difficult for a lender who is not savvy to meet these new time frames and get loans closed on time. So it is very for a crucial for a buyer to choose a good team in both an agent and a lender.”
In general, she said, buyers and sellers can expect longer escrows under the new guidelines. Escrows that typically took 30 days to close may now take up to 45 days, unless they are all-cash transactions.
The regulations go into effect for lenders on any new loan applications taken after Oct. 3, but currently open applications will be processed under previous guidelines. A brief video about the regulations can be viewed on the Pickford Escrow Company website.
Are there other ways to expedite the escrow process?
The day of the week a deed conveyance is recorded at a county recorder’s office can make a difference. Interest payments on a loan might continue over a weekend if a home isn’t recorded on a Friday, for example. The 2015 Optimal Closing Date Calendar on the Pickford Escrow Company’s website is a helpful resource for San Diego County, Orange County, and Los Angeles County buyers and sellers.