Understanding the Escrow Process and Requirements

Escrow does not have to be confusing or intimidating. When you understand the process and requirements, it is easier to prepare.

Escrow is one of those real estate terms that is thrown around a lot. For first time homebuyers, it can feel like a confusing and complicated process. There is so much that goes into buying a home. After the offer, then comes the inspection, plus getting financing, and securing insurance. One of the most challenging parts of this process is understanding escrow.

Escrow is the period between when the seller accepts the offer, and the buyer gets the keys. Follow this simple step-by-step process to help you navigate this part of the home buying process the best.

Open an account

The first thing you need to do after agreeing on a price and signing a purchase agreement is to open an escrow account. Your real estate agent will collect earnest money and put in into the account. An outside party manages it on behalf of two agreeing parties until specific conditions are met. The escrow company collects money and documents involved in the closing process. This includes the earnest check, loan documents, and signed deed.

Wait for the bank

As the buyer, you usually will have to pay the bank or lending provider to conduct its appraisal of the property. The lender does this to protect its financial interests. If the evaluation comes in lower than the offer price, the lender will not give you financing. You might be able to change the appraiser’s mind if you are able to provide additional information on why you believe the home should be appraised at a higher amount. You could also get a second appraisal. If you are not able to secure funding, you are able to cancel the purchase contract.

Secure financing

You are probably already pre-approved for a mortgage, and once you give your lender the property address, it can prepare a good faith estimate. The good faith estimate is also called a statement that details the amount of your loan, interest rate, closing costs, and all other costs associated with your new home purchase. Often, you can negotiate on the numbers before you sign.

Approve seller disclosures

During this portion of the escrow process, you should receive written notification of any problems that are already known about the property. These problems are probably previously known since they are often mentioned in the listing.

Have the home inspected

It is in your best interest to obtain a home inspection even though you are not required to do so. A professional inspection will alert you to anything dangerous or costly about your new home. You want to know about these things ahead of time, so you can negotiate the selling price or ask the seller to fix them. Keep in mind you cannot negotiate seller concessions at this point if the contract says the purchase is “as is.”

Pest inspection

Just like a home inspection, pest inspections are not always required by the lender. However, it is in your best interest to get one. Making sure there are not termites, carpenter ants, or other pests will give you peace of mind. In addition, these pests are often not present during the daytime when you have been to see the property. Resolve pest issues before you move in, assuming you want to move forward with the purchase.

Environmental inspection

Environmental inspections evaluate your new home for toxins like mold and asbestos. These problems can be severe health concerns and might be exceptionally expensive to fix.

Other inspections

If you live in an area that is prone to earthquakes or floods, you should consider inspections to evaluate for these potentials. If a home is likely to flood, you are not going to be able to get homeowner insurance, which means you cannot get a mortgage.

Buy hazard insurance

Hazard insurance is anything that is required based on your specific region like flood insurance. You are going to be required to have homeowner’s insurance for the duration of your mortgage. Hazard insurance will help protect you in the event of a natural disaster.

Title report and insurance

Your lender requires both, and even if it were not needed, you would want them anyway. The title report makes sure that the property title is free and clear and there are no existing liens on it. Title insurance protects both you and your lender from legal challenges that could arise later. The seller has to remedy all issues with the title before the sale proceeds. In some locations, the escrow company and the title company are often the same.

Final walk-through

One final walk-through is a great idea just before closing. This makes sure there is no new damage to the property, and the seller has left all of the agreed-upon appliances and fixtures. Generally, you are not going to be able to back out of the sale until its sustained serious damage.

Review the HUD-1

The HUD-1 form is a final statement of loan terms and closing costs. Look at the good faith estimate from the beginning of the home buying process and compare the numbers. They should look very similar. Make sure you double-check for unnecessary charges and outright mistakes.

The closing process will vary in time based on where you live. You are going to have to sign a lot of paperwork, but do not’ let that overwhelm or pressure you. Make sure you read the papers carefully and take your time. After everything is completed, the escrow officer will prepare a new deed with your name on it. You have to either give a cashier’s check or make a wire transfer to meet the remaining down payment.

As a recap, the escrow process is the time between the seller accepting the offer and the buyer taking possession. The first part of the process is opening an account where the deposit is being held. Then the buyer has to wait for bank approval, secure financing, and get inspections completed. The buyer also has to buy hazard insurance, do any final walk-throughs, and go through closing. Keep in mind a buyer can walk away from the agreement at any time if the conditions are not met or there is a problem with the property.

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