Before you buy a house you may not have had much familiarity with the word escrow but once you begin the buying process it becomes a major part of your life. Escrow is essentially what happens when money is deposited by one person with a neutral third party so that it can be delivered to another party upon completion of an event. In the homebuying process, escrow opens when the buyer and seller sign a purchase agreement and the buyer puts down a deposit. Escrow protects all parties involved by making sure that no funds or properties change hands until all conditions in the agreement have been met.
A neutral third party can be an escrow officer from an escrow company, someone from a title company or from a title and escrow company. Some regional areas use title and escrow attorneys. Custom and market conditions also dictate which escrow costs the buyer or seller pays. The amount typically totals about 1 to 2 percent of the cost of the home.
The Contract Sets The Terms Of The Escrow
After escrow opens, the contract, along with any additional instructions, dictates how the process should be handled and what is necessary to complete the transfer. Real estate transactions involve a lot of documentation and there are steps to complete on both sides in order to close the deal. Your escrow officer opens escrow by assigning your escrow an account number and collecting the contract and the buyer’s deposit. Deposits are either applied to the purchase price, or returned should the deal fall through.
The buyer orders title insurance and a preliminary title search to determine if there are any claims against the title. A preliminary title report points out any liens, easements, or claims against the property that the seller needs to resolve before the property can be transferred.
Working Toward A Successful Close
Generally the contract factors in contingencies for home insurance, flood insurance, home inspections, financing, repairs and other tasks to be accomplished by the buyer or seller before the transaction reaches the next step. Each time a contingency is met, the buyer or seller signs off with a contingency release form or letter copied to all parties, including the escrow officer. Once the loan is funded and all the contingencies are released, the title is cleared, and the buyer inspects the property. Then it is time to prepare for the closing.
Before the close, the buyer’s grant deed, any final escrow instructions or contingency releases, the settlement sheet of disbursements, title reports, the deed of trust lender forms, inspection reports, tax statements and any other paperwork must be signed. Escrow closes and the deal is complete when the escrow office records a new deed in the buyer’s name, the seller gets paid for the home, and all other monies are disbursed.