So, you’ve found the home of your dreams. You obtained a preapproval letter from a mortgage lender. The seller has accepted your offer. You’re excited to enjoy the benefits of owning your own home. You’re practically home-free, right?
Not so fast. There’s still one step left in the homebuying process: escrow.
Escrow is easy to define. But reaching the close of escrow and having the keys to the front door in your hand depends on many factors. This article is going to give you a better understanding of how escrow services work, what the process is like, and provide you with all the information you need to lock in your dream home.
Let’s start with the basics. Escrow is a financial arrangement where a neutral third party, known as the escrow agent, holds and manages funds and important documents during a real estate transaction. This aspect of a real estate transaction helps ensure a smooth and secure exchange of money and property between the buyer and seller.
We asked Tegan Powell, the Escrow Officer-Branch Manager at Pickford Escrow Company, a HomeServices of America Company, in Mission Viejo.
Over the years, the escrow process has evolved. It is no longer just a safe, independent third party escrow agent or company that holds the money until the transaction is complete. Now, escrow officers have much more responsibility, one of which is drawing escrow instructions reflecting the terms of the buyer and seller.
Only when all conditions are met will the lender agree to fund escrow transactions. Once the funding takes place, the title company will request for the transfer of ownership to be recorded at the county recorder’s office. The buyer’s mortgage goes into effect as soon as the recording confirmation is received and sale proceeds are released to the seller.
The escrow process helps safeguard the interests of both the buy and seller in a real estate transaction. For buyers, escrow helps provide reassurance that their money is safe until all terms and conditions of the purchase agreement for the property are met. It also helps provide sellers with peace of mind during the process so they know the buyer has sufficient funds to complete the purchase.
Throughout the escrow process, the escrow officer acts as the central point of communication for all parties involved. They ensure each step is executed accurately and efficiently, thus minimizing the risk of fraudulent activities.
Escrow significantly contributes to building trust between the parties involved in a real estate transaction. Through placing funds and related documents in the hands of an impartial third party, the risk of misunderstandings or potential conflicts is reduced for buyers and sellers. This helps build trust during real estate deals and benefits all parties involved.
In a real estate transaction, several parties play crucial roles in the escrow process:
The escrow fees are customarily split 50-50 between buyer and seller in Southern California. Fee arrangements can vary by state and even regions within states.
Various parties must perform due diligence to assure all elements are acceptable so the loan can be funded.
The elements during an escrow where the buyer is obtaining a loan include:
Typically, the escrow fees are covered by your closing costs.
Mutual Acceptance: The buyer and seller agree on the terms of the purchase, and the purchase agreement is signed.
Earnest Money Deposit: The buyer provides an earnest money deposit to the escrow accounts as a show of good faith and commitment to the purchase.
Title Search and Inspection: The escrow officer conducts a thorough title search and arranges for property inspections to ensure the property’s legality and condition.
Loan Approval and Funding: If the buyer is obtaining a loan, the lender reviews the buyer’s financials and approves the loan. Once approved, the lender funds the escrow accounts.
Closing Documents Preparation: The escrow officer prepares all necessary closing documents, including the deed and transfer of ownership.
Signing and Recording: Both parties sign the closing documents, and the escrow officer records the deed with the county recorder’s office.
Funds Disbursement: After all conditions are met, including the transfer of ownership, the escrow officer disburses funds to the seller, and the buyer officially becomes the new homeowner.
Mutual Acceptance: The buyer and seller agree on the terms of the sale, and the purchase agreement is signed.
Opening Escrow: The seller opens an escrow account with the chosen escrow company.
Title and Lien Search: The escrow officer conducts a title search to ensure the property title is clear of any liens or encumbrances.
Loan Payoff: If the seller has an outstanding mortgage, the escrow officer arranges for the payoff of the loan using the proceeds from the sale.Transfer of Ownership: Once all conditions are met, the escrow officer transfers the property ownership to the buyer, and the sale is complete.
As many homeowners know, various outcomes can slow or even end the escrow.
If a home does not appraise at the purchase price, that can be a main factor that ties the process up, according to Tegan.
For example, a home that is on the market for $750,000 and goes under a contract for that price could only be appraised for $735,000. If that happens, the lender may not lend until the price is reduced or, in some cases, the lender may still move forward if the buyer is able to bring in a larger down payment.
When one or both parties aren’t willing or able to reduce the sales price, it can lead to falling out of escrow.
One of the most common reasons for an escrow to cancel is the buyer not being able to obtain financing, even with a preapproval letter. Lenders tend to be very willing to write a preapproval letter to 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,” she said. “Sometimes we won’t get an approval until two full weeks into a transaction.”
Another typical scenario, Tegan said, is when a buyer asks for excessive repairs and the seller isn’t 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,” Tegan 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.”
When it’s time to close escrow on a property, make sure all documents have been completed and reviewed by a professional to prevent further complications later in the process.
There are some common misconceptions about escrow that are helpful to understand before you start the process:
In many real estate transactions, escrow is mandatory to ensure a secure and legally binding exchange of funds and property.
Online security is one of the most essential elements in an escrow transaction since it involves one of the biggest purchases of most people’s lifetime: their home. So it is important to use escrow services that takes steps to ensure funds are not misdirected or personal information subjected to hacking now or in the future.
Your escrow company is mandated to report the purchase or sale of a residential property or estate to the Internal Revenue Service. In the service process, the escrow firm must collect all parties’ non-public personal information, such as Social Security numbers, date of birth, bank account numbers. It’s the kind of information you don’t want hackers to have. To be safe, select an escrow company that is SOC1 and SOC2 certified by a third-party auditor to protect against online predators.
Buyers need to make sure they are using an accredited lender that is savvy and familiar with new federal requirements. An escrow agent will guide you throughout the entire process.
“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. The Pickford Escrow Company and The Escrow Firm branch managers and escrow officers attend the weekly sales meetings that Berkshire Hathaway HomeServices California Properties hold for all agents. We are able to keep them constantly informed about any new regulations, so they can help buyers and sellers make educated decisions moving forward.”
While escrow is designed to help protect all parties involved, there are potential risks that can impact the transaction. Some common risks include:
To help mitigate the risks associated with escrow, there are various safeguards in place to provide protection:
Professional Guidance: Seeking guidance from experienced real estate agents and escrow officers ensures that the transaction follows all legal requirements and best practices.
The Consumer Financial Protection Bureau (CFPB), an organization that governs financial institutions, including residential real estate and closing services, mandates the new federal regulations.
“They have stricter timelines and stricter disclosure requirements for lenders,” Tegan said. “They make it a lot more difficult for a lender that is not savvy to meet these timeframes and get loans closed on time. So it is very crucial for a buyer to choose a good team in both an agent and a lender.”
Buyers and sellers are now facing longer escrows under than in the past. Instead of the typical 30 days to close, it is now common to take up to 45 days unless they are all-cash escrow transactions.
A brief video about the regulations can be viewed on the Pickford Escrow Company website.
Interest payments on a loan might continue over a weekend if a home isn’t recorded on a Friday, so the day of the week a deed conveyance is recorded can make a difference. The 2017 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.
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Reviewed by Dean Stalter
Dean Stalter is proud to be the Broker of Record for Berkshire Hathaway HomeServices California Properties. He represents the nearly 3,000 agents that make up the company’s presence in Southern California, spanning Santa Barbara down to San Diego. An award-winning real estate veteran, Dean is a great subject matter expert in all things real estate.