If you are buying or selling a home, the term “escrow” will no doubt come up in conversation. Escrow refers to a third party that is hired to handle the property transaction, including the exchange of funds. A neutral third party is used to help ensure that the transaction remains safe and that both the buyer and seller meet their obligations. Escrow is not a tangible item, but rather a process involved in the closing of real estate. This process can take several weeks or even months to complete and typically requires a great deal of paperwork and conditions that must be met. If all goes well, escrow is completed and the real estate transaction is a done deal.
Opening an Escrow Account
What does escrow mean, exactly? It is a financial instrument that acts like a trust account in which the buyer and seller deposit documents, written instructions, and money with a third party until specific conditions are fulfilled. The escrow process begins once the seller has accepted an offer for the home. The buyer and seller must both sign a purchase agreement and the real estate agent collects any earnest money and deposits it into an escrow account. The escrow company used to hold the funds should be listed on the purchase agreement.
Having an escrow account that is neither accessible by the buyer or seller ensures that funds are not distributed until both the buyer and seller are able to meet on the terms and conditions of the purchase agreement. These minimizes risks for all parties involved, including the lender. When a buyer puts funds into an escrow account, it shows the seller that the buyer is acting in good faith and has the ability to pay. Escrow also shows the buyer that the seller actually owns the real estate and that there is a clear title and no liens. The lender receives peace of mind that the money is secure.
Signing a Mortgage Agreement
Before you can enter escrow, you will need to finalize your mortgage loan if you are the buyer. Up until this point, you have probably already secured a mortgage pre-approval from your lender. However, before a mortgage can be finalized the lender will want to appraise the property to determine what type of loan is best and what interest rates and fees apply. Before signing the mortgage agreement, carefully read the terms and conditions to ensure that you agree. There may be some conditions to the agreement. For example, you may need to conduct a home inspection and obtain title insurance.
This part of the process can be lengthy as you will need to wait for the bank’s appraisal. If the appraisal comes in lower than the price the buyer offered, the lender will generally not provide financing for the difference unless you are willing to pay for it out-of-pocket. You can also see if the seller is willing to come down on the price to the appraised amount. You also have other options. You can provide the appraisal with additional information on why you think the property should be appraised at a higher amount or you can ask for a second appraisal. You also have the option to change lenders.
Transferring the Property Title
As you inch closer to the closing date, you will be met with lots of paperwork. One of the most important documents to read is the closing disclosure. This paper will show the terms of your mortgage loan, the final closing costs, and any outstanding fees you may still owe. During your closing appointment, you will need to review, initial, and sign any remaining paperwork. At closing, be sure to bring your down payment, personal identification, and your checkbook in the event that you need to pay any remaining fees.
At the closing, you can expect to meet with both the buyer’s and seller’s real estate agent, the mortgage lender, the title company representative, and the lender’s and buyer’s attorney if they have one. This will be the time that you close escrow. This process can vary from state to state but the escrow officer will typically prepare a new deed that names the buyer as the new property owner. The buyer then arranges a wire transfer or submits a cashier’s check to pay for the down payment and closing costs. The lender will then wire the loan funds to escrow so that the seller can be paid. The process is then complete.
Learn More About Escrow
Escrow is a useful tool that helps ensure that a real estate transaction is safe for both buyers and sellers. On average, the process takes between 5 and 20 days. For more information about what escrow means or to learn more about the process, contact the Katie Zarpas Group today.