It can often feel like everyone is speaking in another language during the homebuying process.
One such term that you might hear often is escrow. The word "escrow" might be used individually or in the phrase, "close of escrow." Understanding escrow, what it means, and why it is necessary is an important part of the homebuying process.
So What Is Escrow, Anyway?
There are essentially three financial accounts present when someone decides to buy a house.
The first is the buyer's and the second is the seller's. The third account, also known as an escrow account, is a separate account that is used to hold funds until all required terms of the sale are met.
"Escrow" refers to the neutral third party that temporarily holds funds and property until the deal is officially closed. After the sale is complete, depending on your mortgage type, your lender may require that you keep a year of taxes and insurance in escrow.
The Steps to Take for Close of Escrow
You have received an accepted purchase agreement and you and the seller are ready to begin the process of escrow. As you work toward the close of escrow, you will need to complete certain steps:
- Choose a title company. You and the seller will need to agree on an escrow agent, which is generally a title company or closing attorney - depending on the state you live in. If you are working with a Realtor, their broker may choose to hold the earnest money funds or have a title company in mind who will hold the funds in their escrow account. Once a company is chosen, you will send the details of the sale to the escrow agent, including the property details, agreed-upon purchase price, legal names of all parties involved, commission details, and the contact information of all agents involved.
- Review the seller's disclosure. A seller's disclosure is a document that lists all known problems and defects with the property. It is given in an attempt to protect both the buyer and seller and to encourage a sale that is made with full awareness. Carefully review this document, as once it is signed, any listed defects are no longer a reason to back out of the purchase.
- Complete all inspections and appraisals. Now is the time to complete any necessary inspections or appraisals. Many lenders require an appraisal, and a buyer may or may not want an inspection on the property. If there are any major problems, this is the time to request that the seller fix them or adjust the purchase price to make up for them. It is important to put a timeline on the request. If the seller does not complete the repairs by the agreed-upon date, you have the chance to back out of the purchase.
- Review escrow documents. After the inspection and appraisal are completed to the satisfaction of the buyer and seller, the buyer will receive escrow documents. Carefully review these documents. You may or may not choose to go over these documents with a real estate attorney. During this time, you will also need to submit a cashier's check that covers the down payment, closing costs, and lending fees.
- Inspect the property before final escrow. Once all of the necessary documents are submitted and approved, the escrow company will issue an expected close date. Either the evening before or the morning of, you will want to do a final walk-through of the property to ensure that it is in the same shape as when you made the offer. Otherwise, if you go through with the close of escrow, you may have little remediation if you identify problems afterward.
- Meet and sign the closing documents. If everything is completed to your satisfaction, then you will meet with the seller, all agents, the title company, and the escrow company to sign all required documents.
It is possible that your lender will have additional requirements. Some lenders, for example, may require that you have a year of insurance and taxes deposited into the escrow account before closing the sale.
Which Documents Do You Need for Close of Escrow?
The specific documents that you need to close escrow will depend on how you are funding the purchase.
If you are paying cash, then you will need a transfer deed. You will sign the deed, have it notarized, filed, and then you are ready for the close of escrow. Because most home buyers will take out a mortgage loan, it is likely that you will need other documents to close escrow. The following documents are often needed:
- Transfer deed: A transfer deed will still be needed with a mortgage loan. This document transfers the registration of the property from the seller to the buyer.
- Bill of sale: A bill of sale includes a list of all items included in the sale. This includes appliances, furnace, central cooling unit, security system, light fixtures, and any other items that were negotiated for during the purchase agreement.
- Affidavit: The seller must provide a seller's affidavit. This document should be notarized and states that the seller is the owner of the property. The affidavit will also include any important information about the property, such as existing leases or liens.
- Mortgage: A signed mortgage deed identifies that you are already approved to take out a loan to fund the sale. The mortgage is registered with the city and becomes a lien on the property.
- Mortgage Application: Most lenders will require an updated loan application during escrow. This allows you to notify them of any changes including change of employment or pay since you submitted the first application.
- Closing disclosure: You will need to sign a closing disclosure, which demonstrates your understanding of the mortgage process. This document will vary, depending on your lender.
Your lender may require additional documents depending on the type of loan and the complexity of the title.
Now Can I Celebrate?
Once escrow is closed, you can officially celebrate the purchase of your new home. The close of escrow means that all requirements have been met and that the funds and property are transferred. The seller is paid, and you can now take full possession of the property.