Escrow Process – Understanding from Earnest Money Through Closing

So you have decided to buy a home.  OK, you probably understand some basics like making the offer and eventually getting the keys.  But, if you’re like most, there are a lot of questions in between the two steps.  This is called the escrow process.  Although escrow is not the most exciting part of a purchase, it is important to understand the escrow process timeline.  Preferably before it starts!  So let’s discuss in detail how the escrow process for buyers works from contract to getting the keys.

Escrow Process Timeline

First of all, the actual process varies throughout certain regions of the country.  Additionally, the type of financing obtained may change the process slightly.  Therefore this discussion should cover most areas and assumes the buyer uses a mortgage loan to buy.  The primary timeline lays out as follows:

1.  Prequalification

2. Make the Offer

3. Earnest Money Deposit

4. Inspections

5. Appraisal

6. Title Search

7. Underwriting

8.Finalize Insurance(s)

9. Review Closing Disclosure

10.  Closing & Recording (Hint – You Get the Keys!)

A successful closing requires a team of awesome, experienced professionals working together.  These professionals will explain the process and walk you through as well.  Let’s further discuss these 10 steps of the escrow process for the buyer.

Get Prequalified for a Mortgage

In order for a seller to take your offer seriously plus compete with other offers, a solid prequalification is necessary.  This letter lets the real estate agent and seller know that you qualify for a mortgage loan.  Although, there are varying levels of a prequalification.  The weakest one, which doesn’t even pull credit, is worthless.  Yet a buyer can even take it as far as getting a full blown approval up-front.  This includes reviewing all income, asset, and credit documentation.  Then there are variations in between.  It is recommended that buyers provide information up-front so the sellers see a highly qualified offer.  Therefore chances are greater of a seller contract acceptance as well as a quicker closing.

Make the Offer

Usually the first person chosen in the escrow process is a real estate agent.  A Realtor is truly an agent of the buyer.  This mean he/she is an advocate looking to get the best deal for the buyer.  As part of his or her job, the Realtor will help clarify important questions prior to beginning the home buying process, like whether or not it is actually better to rent before owning a home.  If it makes financial and emotional sense to move forward, them it’s time to begin the search process. After prequalifying for a mortgage, the agent and buyer target homes in the desired areas that meet the buyer’s comfort level.  After finding the perfect home, an offer is prepared by the buyer’s agent and presented to the seller’s agent.  Often, there are negotiations back and forth honing in a final figure that both sides agree to.  Of course, it doesn’t always work this way.  Sometimes the seller takes another offer or just the two parties cannot agree on a final amount.  Part of the purchase contract includes up-front money called earnest money.

Earnest Money Deposit Explained

The escrow process starts with an offer to purchase and an earnest money deposit.  At the point of making an offer, the buyer issues the deposit to the escrow agent.  Basically an earnest money deposit is good faith money given by the buyer.  It shows the seller that the buyer is serious about the purchase.  A popular misconception is that the funds are given to the seller.  First of all, this is never a good idea.  Even when there is a for sale by owner, do not give the deposit to the seller.

There are specific rules which escrow agents must follow in regards to handling the good faith money.  First, the funds are placed in the escrow agent’s trust account.  Keep in mind that the escrow agent must account for every dime deposited or withdrawn.  Most of the time, there is nothing to worry about in regards to the funds.  But sometimes an issue with the sale or a dispute arises.  Then the escrow agent must follow the law and the contract language to determine the fate of the deposit.

Inspections – What is the Condition of the Property?

After houses are in escrow, it is imperative to order applicable inspections on the property.  Most inspections are not required but highly recommended.  If purchasing in areas where termites are prevalent, a wood destroying insect report should be ordered.  More popularly known as a termite report, it checks for infestation, damage, and even moisture issues.  Home inspections review the overall health of the property.  Choose a licensed and insured inspector to review the electrical, plumbing, roof, foundation, and overall structure.  Upon completion of these inspections, a detailed report is given to the buyer.  At this point, the buyer makes the decision to continue, request repairs, or cancel the contract.  Always complete the inspections prior to the contract inspection deadline, which in some states is called the “due diligence” period.

Appraisal – What is the Home Worth?

Lenders obviously want to verify the value of the property securing the mortgage loan.  But a buyer also needs to know if the home being purchased is worth the price being paid.  Obviously buyers want the appraisal to meet or exceed the purchase price.  Although in some hot markets, it is not uncommon for a buyer to pay more than the appraised value.  A reason would include a situation where the competition for the property required a higher offer.  Once the appraisal is completed, a copy is provided to the buyer for review.  Typically the lender will discuss the appraisal details with the buyer.  Plus the lender will submit the report to it’s underwriter for review as well.

Title Search

While the before mentioned processes take place, the attorney or title abstractor reviews the background of the property.  A title search includes reviewing the chain of title.  The primary purpose of the title search is to ensure the home will be free of encumbrances.  Plus it verifies the sellers may actually sell the property.  Generally a title search is not provided to the buyer during the escrow process, but is provided to the lender.  The final piece of the title search includes the title insurance policy.  Title insurance insures the buyer and lender that at close of escrow, the property is conveyed free of any issues.  The title insurance protects the buyer and lender against title issues potentially missed in the search.  The buyer may request a copy of the title search at any time after completion.  Buyers receive a copy of the title insurance policy at close of escrow.

Underwriting

Assuming there is a mortgage involved, the buyer’s lender will review all paperwork to decide if the transaction can take place.  Again, it is best to provide documentation early to the lender to prevent last second underwriting issues.  The lender reviews income, asset, credit, and collateral.  Items required and length of the underwriting process depends on the lender as well as the complexity of the buyer’s scenario.

The ultimate goal of course is a final approval to close.  Then the loan goes to the lender’s closing department which starts the final portion of the buyer’s close of escrow process.  This is a good time to give a buyer the warning not to unknowingly sabotage the closing.  The best advice is to be boring throughout the escrow process which means don’t change jobs, excessively move funds around, deposit cash, and make credit mistakes.  In addition to this article, we highly suggest learning Credit Mistakes to Avoid Prior to Closing, for a successful closing.

Finalize Insurance Policies – Steps to Insure Your Property

Even though we show the insurance step near the end of the process, it is important to start early.  Actually it is recommended to choose insurance agents shortly after signing the purchase contract.  But it can even be done earlier!  Insurance products required vary based on the location and property type.  At minimum there is a homeowners insurance or hazard insurance policy.

Homes on the coast may require additional wind or storm coverage called wind & hail insurance.  This covers the property against hurricane, wind damage, or hail damage.  While some policies may include these coverages already, sometimes it must be a separate policy.  Finally there is flood insurance, which covers property against rising waters.  This is obviously required when purchasing next to bodies of water.  But plenty of properties no where near water may flood after a heavy storm.  There may be additional insurance coverages available and the buyer should have a thorough discussion with the chosen agent.

Review the Closing Disclosure – Final Numbers for Closing

Starting in October of 2015, the escrow closing process and documentation changed.  Most closings that are not cash closings now require a Closing Disclosure (called CD) rather than the HUD settlement statement.  Along with the change in forms, the CD must be provided to the buyer 3 days prior to settlement.  The CD provides a final breakdown of closing costs, prepaid items, amount to bring to closing, and total mortgage payment.  The mortgage loan officer will fully explain the CD to the buyer.  Additionally the final stage of the escrow process called closing will be explained.

Closing and Recording – Getting the Keys!

Ok, you made it to the closing table.  You have completed the inspections, the loan is fully approved, insurances are in place, and the title work is clear.  So what is left?  Signing the paperwork to seal the deal!  Actually on the day of closing, there’s a lot going on behind the scenes.  The settlement agent is preparing the closing package and planning the day for your signing and recording.  Also the real estate agent typically walks the buyer through the house which is called the final walk through.

Close of Escrow

Anyone that will be on title needs to attend closing and bring identification.  Of course, do not forget to bring your funds to closing.  Keep in mind that settlement agents require certified funds for closing.  So buyers should ask the closing agent for preference of funds.  Some require a wire from the buyer’s bank where others are fine with a certified funds check.  Always ask and line up this withdrawal at least a day prior to closing.  While signing the paperwork, always ask any questions.

Getting the Keys

So you have signed your papers and then the most popular question is asked.  When do I get the keys.  So let’s not make you wait to know this answer.  Technically the property still belongs to the seller until the deed is actually recorded in the buyer’s name.  Once the closing agent has completed all escrow requirements and deed plus mortgage are recorded, you’re now the owner.  This is when the buyer receives the keys and can then move in.  Remember that warning earlier about being boring?  Once the deed is recorded, buying appliances or anything like that is ok.  Like you probably did for your purchase, research companies for your other home purchases too.

Enjoy your home!  Check out other helpful articles on our site.

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