Buying a home for the first time (or even the second time) can be an intimidating process. Not only are you making one of the largest purchases in your life, but you’re also being introduced to a completely new set of words, rules, and customs.
One of those confusing terms that gets thrown around a lot in the real estate world is “escrow.” To further the confusion, escrow has a couple of different meanings depending on the context in which it’s used.
Let’s break down what the word means and what happens when you “go into escrow.”
What Does it Mean When You “Go Into Escrow”?
The simplest definition of escrow is that it’s a neutral third party that acts as a repository for keeping your money safe during a real estate transaction.
As a home buyer, you will typically enter into escrow after you have agreed with the seller on a final price for the home purchase. You will both sign and date an agreement and give it to an escrow officer or escrow company.
The responsibilities of the escrow company include safely storing the earnest money (also called a “good faith” deposit) along with the money from the lender until the transaction can be finalized.
Your escrow company will also create your closing documents, initiate a transfer of property, and finally release the loan funds and earnest money to the seller. When all the above is complete, they will fulfill the transfer of ownership. Usually, the escrow company acts as the title company and issues title insurance for the property.
Note: Escrow as discussed above is different than an “escrow account,” which is an account set up with your mortgage lender for them to reserve a portion of your monthly mortgage payment to cover property taxes and property insurance.
Why Does Escrow Take Place?
The reason why escrow takes place is to make sure that your money for a real estate transaction is safe.
“It truly is a risk-avoidance strategy,” says Laura Brodniak, a broker for Windermere Real Estate in Seattle. “It’s a trusted, neutral third-party provider that allows people to probably sleep better at night, knowing that their money is safe and secure and that the seller is not going to take it and refuse to sell the property.”
What are the Steps in the Escrow Process?
Although the steps in the escrow process can vary by state, you can generally expect the following to occur:
- Mutual acceptance. Everyone has agreed and signed the real estate contract.
- Contracts are sent. Both the buyer and the seller’s agent will send a copy of the signed contracts over to the escrow company. The escrow company then confirms that the two contracts are identical and verifies that the terms of the contract are in agreement.
- Escrow is opened and title is opened.
- Your identity is verified. The escrow company will reach out to the buyer and seller, often sending a request for affidavit of identity form to confirm that you are who you say you are. The escrow company will also request for the seller’s mortgage payoff and will reach out to any HOA or condo associations to ensure there are no unpaid dues or unpaid special assessments in order to transfer ownership.
- The buyer’s lender will be contacted. The escrow company will bring the buyer’s lender into the loop to keep them updated on status.
- A 30-day waiting period takes place. At this point in the transaction, the escrow company is taking a step back (for a typical period of 30 days) and waiting for the buyer and seller to complete inspections, appraisals, and negotiations as well as the lender’s underwriting process. The escrow company will jump back into the process if the closing date needs to change or if money for repairs needs to be exchanged between buyer and seller.
- The escrow company will prepare closing documents. Once the buyer’s loan has been approved with a closing date on the calendar, the lender will send the documents to escrow and then escrow will prepare them.
- The escrow company will schedule appointments for closing. Both the buyer and the seller will have to sign a stack of paperwork in order to make the deal official. In some states, this is all done together in one room and in other states, buyer and seller appointments are made separately.
- The escrow company will send the documents to be recorded. At that point, the deal is official and has been recorded with the county.
How Much Do I Have to Pay During Escrow?
With the exception of the earnest money deposit, the buyer will not have any money coming out of their pocket at the beginning of escrow.
“There are usually requirements within the boilerplate of the contract that indicate how long someone has to get their earnest money check to the escrow company. Typically, this is two or three days, depending on whether the agent gives the check to escrow,” Brodniak says.
The money that you put down for an earnest deposit is deposited by the escrow company into a trust, which is cashed immediately.
What Are Some Issues that Can Pop Up During Escrow?
Problems can pop up during any point of a real estate transaction, but the ones that most commonly occur while you’re in escrow are the following:
- Seller and buyer being unable to resolve disagreements over any issues that arise during the home inspection.
- Loan financing for the buyer falling through at the last minute.
- A problem with the title (i.e. it’s not a “clean title”), although this is rare – usually a listing agent looks at the title report beforehand to avoid any issues.
Another problem that is becoming increasingly common during the escrow process is wire fraud. When buyers need to send money to the title company for a down payment or closing costs, many choose to wire the funds directly instead of going to the bank and getting a cashier’s check. However, scammers have found ways to insert themselves in this process.
“Buyers need to be very careful during the escrow process if they are receiving requests for funds to be wired,” Brodniak says. “Never wire funds without getting on the phone with the escrow officer. There’s lots of phishing happening and people are losing hundreds of thousands of dollars.”
If you are in the position of choosing the escrow company, be sure to choose a company that has a strong insurance policy and to be aware of any fraudulent activity on record. Research the title company you’re working with so that you know they are trustworthy with this large amount of funds you’re entrusting them with.
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