Mortgagerateslocal.com – Buying or selling a property can be a complex and stressful process, especially when it involves escrow. You must know about the escrow process and requirements before making financial decisions.
Escrow is a legal arrangement where a third party holds money or assets on behalf of two parties who are completing a transaction. Escrow ensures that both parties meet their obligations and protect their interests before the transfer of ownership takes place.
But what exactly is escrow and how does it work? What are the steps and requirements involved in the escrow process? How can you prepare for it and avoid common pitfalls?
We will answer these questions about escrow process and requirements We will provide you with a comprehensive and easy-to-understand guide on how to navigate the escrow process and requirements, whether you are a buyer or a seller. Let’s get started!
What is Escrow and Why is it Important?
Escrow is a legal concept that describes a financial agreement where a third party, called the escrow agent, holds money or assets on behalf of two parties who are in the process of completing a transaction. The escrow agent acts as a neutral and impartial intermediary who ensures that both parties fulfill their contractual obligations before releasing the funds or assets to the appropriate party.
Escrow is important because it provides security and peace of mind for both parties in a transaction. For the buyer, escrow ensures that they will receive the property or service they paid for, as long as they meet the agreed-upon terms and conditions. For the seller, escrow ensures that they will receive the payment for their property or service, as long as they deliver it according to the agreed-upon terms and conditions.
Escrow also helps to prevent fraud, disputes, and litigation, as the escrow agent verifies and documents all the steps and transactions involved in the process. Escrow also reduces the risk of loss or damage to the money or assets, as they are held in a secure and regulated account by the escrow agent.
The Different Types of Escrow Accounts and How They are Used
Before you know escrow process and requirements, there are two main types of escrow accounts that are commonly used in real estate transactions: purchase escrow and mortgage escrow.
Purchase Escrow
Purchase escrow is the type of escrow account that is used when a buyer and a seller agree to buy or sell a property. The buyer deposits a certain amount of money, called the earnest money deposit, into the purchase escrow account as a sign of good faith and commitment to the transaction. The earnest money deposit is usually a percentage of the purchase price and is applied to the down payment or the closing costs at the end of the transaction.
The purchase escrow account is also used to hold other funds and documents that are required for the transaction, such as the loan documents, the title report, the inspection report, the appraisal report, the hazard insurance, and the deed. The escrow agent is responsible for collecting, holding, and disbursing these funds and documents according to the instructions of the buyer and the seller.
The purchase escrow account is opened when the buyer and the seller sign a purchase agreement, which outlines the terms and conditions of the transaction, such as the purchase price, the closing date, the contingencies, and the escrow instructions. The purchase escrow account is closed when the transaction is completed and the ownership of the property is transferred from the seller to the buyer.
Mortgage Escrow
Mortgage escrow is the type of escrow account that is used when a buyer obtains a mortgage loan to finance the purchase of a property. The mortgage escrow account is used to hold and pay for the recurring expenses that are associated with owning a property, such as the property taxes, the homeowners insurance, and the mortgage insurance.
The mortgage escrow account is opened by the lender or the servicer of the loan, who collects a certain amount of money from the borrower every month, along with the principal and interest payments. The lender or the servicer then pays the property taxes, the homeowners insurance, and the mortgage insurance on behalf of the borrower, using the funds in the mortgage escrow account.
The mortgage escrow process and requirements by some lenders as a condition for approving the loan, as it ensures that the borrower will not default on these payments and that the property will be protected from tax liens, fire, or other hazards. The mortgage escrow account is also beneficial for the borrower, as it helps them to budget and plan for these expenses, rather than having to pay them in large lump sums.
The mortgage escrow account is opened when the loan is originated and is closed when the loan is paid off or refinanced. The lender or the servicer is responsible for managing the mortgage escrow account and adjusting the monthly payments according to the changes in the property taxes, the homeowners insurance, and the mortgage insurance. The lender or the servicer is also required to provide the borrower with an annual statement that shows the activity and the balance of the mortgage escrow account.
The Escrow Requirements
The escrow requirements are the requirements and the obligations that are imposed and fulfilled by the parties involved in the transaction, such as the escrow agent, the buyer, and the seller. The escrow requirements can vary depending on the type of property, the location, the lender, the contract, and other factors. However, there are some common escrow requirements that are usually involved in most escrow transactions. Here is a summary of the common escrow requirements and who is responsible for them:
The Escrow Agent
The escrow agent is the third party who acts as the intermediary between the buyer and the seller. The escrow agent can be a title company, a bank, a law firm, or an individual who is licensed and regulated by the state. The escrow agent is responsible for:
- Opening and closing the escrow account
- Collecting, holding, and disbursing the funds and documents
- Verifying and documenting the completion of the required steps and transactions
- Communicating and coordinating with the buyer, the seller, the lender, the real estate agents, the inspectors, the appraisers, the insurance agents, and other parties involved in the process
- Preparing and providing the escrow instructions, the escrow statement, the closing statement, and other documents
- Resolving any issues or disputes that may arise during the process
- Complying with the laws and regulations that govern the escrow process
The escrow agent is paid a fee for their services, which is usually split between the buyer and the seller, unless otherwise agreed upon. The escrow agent is expected to act in a neutral and impartial manner and to protect the interests of both parties.
The Buyer
The buyer is the party who agrees to purchase the property from the seller. The buyer is responsible for:
- Depositing the earnest money into the escrow account
- Obtaining the mortgage loan and providing the loan documents to the escrow agent
- Approving the seller disclosures, the title report, the inspection report, the appraisal report, and other documents
- Purchasing the hazard insurance and providing the proof of insurance to the escrow agent
- Performing the final walk-through of the property and confirming its condition
- Signing the closing documents and paying the closing costs
- Receiving the keys and the deed to the property
The buyer is also responsible for meeting the deadlines and fulfilling the contingencies that are specified in the purchase agreement. The buyer can cancel the transaction and get a refund of the earnest money if the seller fails to meet their obligations or if there is a problem with the property that cannot be resolved.
The Seller
The seller is the party who agrees to sell the property to the buyer. The seller is responsible for:
- Providing the property disclosures, the title report, the deed, and other documents to the escrow agent
- Delivering the property in the agreed-upon condition and making any repairs or improvements that are required
- Signing the closing documents and paying the closing costs
- Transferring the keys and the deed to the buyer
The seller is also responsible for meeting the deadlines and fulfilling the contingencies that are specified in the purchase agreement. The seller can cancel the transaction and keep the earnest money if the buyer fails to meet their obligations or if the buyer backs out of the deal without a valid reason.
Steps of the Escrow Process and What to Expect in Each Stage
Escrow process and requirements play pivotal roles in the real estate landscape, acting as crucial elements in ensuring a secure and transparent property transaction. process and requirements involves a neutral third party, often an escrow agent or company, who holds funds and important documents during the buying or selling of a property. This safeguards both the buyer and seller, ensuring that contractual obligations are met before the deal is finalized.
The escrow process can vary depending on the type of property, the location, the lender, the contract, and other factors. However, there are some common steps that are usually followed in most escrow transactions. Here is an overview of the 10 steps of the escrow process and what to expect in each stage.
1. Opening Escrow
The first step of the escrow process is opening escrow. This happens when the buyer and the seller sign a purchase agreement and deposit the earnest money into the escrow account. The purchase agreement is the document that outlines the terms and conditions of the transaction, such as the purchase price, the closing date, the contingencies, and the escrow instructions. The escrow instructions are the specific instructions to complete the transaction. The escrow instructions also include the contact information of the parties involved, the escrow fees and charges, and the distribution of the funds.
The escrow agent then opens the escrow account and assigns an escrow number to the transaction. The escrow agent also sends a confirmation letter to the buyer and the seller, which summarizes the escrow instructions and the escrow fees and charges.
2. Ordering Title Report
The second step of the escrow process is ordering the title report. The title report is the document that shows the legal status and the history of the property, such as the ownership, the liens, the easements, the encumbrances, and the defects. The title report is important because it reveals any issues or problems that may affect the transfer of ownership of the property.
The title report is ordered by the escrow agent from a title company, which is a company that specializes in researching and verifying the title of the property. The title company conducts a title search, which is the process of examining the public records and the legal documents related to the property. The title company then prepares and issues the title report, which is sent to the escrow agent, the buyer, the seller, the lender, and the real estate agents.
The buyer and the seller are responsible for reviewing the title report and approving or objecting to its contents. If there are any issues or problems with the title, such as liens, easements, or defects, the buyer and the seller must work together to resolve them before the closing. The buyer and the seller may also request a title insurance policy, which is a policy that protects them from any losses or damages that may arise from a defective title.
3. Obtaining Loan Approval
The third step of the escrow process is obtaining the loan approval. This step applies only to the buyer who is financing the purchase of the property with a mortgage loan. The loan approval is the process of getting the lender to approve the loan application and the loan terms, such as the loan amount, the interest rate, the loan term, the monthly payment, and the closing costs.
The loan approval process involves several steps, such as:
- Submitting the loan application and the required documents, such as the income, the assets, the credit, and the employment verification
- Ordering the appraisal report, which is the document that shows the estimated value of the property based on its condition, features, and market trends
- Ordering the credit report, which is the document that shows the credit history and the credit score of the borrower
- Ordering the flood certification, which is the document that shows whether the property is located in a flood zone or not
- Ordering the pest inspection, which is the document that shows whether the property has any infestation or damage from termites or other pests
- Reviewing and underwriting the loan application and the documents, which is the process of verifying and evaluating the borrower’s ability and willingness to repay the loan
- Issuing the loan approval or the loan denial, which is the decision of the lender to approve or reject the loan application based on the borrower’s qualifications and the loan terms
The buyer is responsible for providing the loan documents and the loan approval to the escrow agent, the seller, and the real estate agents. The buyer is also responsible for meeting the loan contingencies and the loan conditions, which are escrow process, requirements and the stipulations that the lender imposes on the loan approval, such as the appraisal value, the credit score, the income verification, and the hazard insurance. The buyer can cancel the transaction and get a refund of the earnest money if the loan is denied or if the loan terms are unacceptable.
4. Conducting Inspections and Disclosures
The fourth step of the escrow process is conducting the inspections and disclosures. The inspections and disclosures are the processes of examining and revealing the physical and legal aspects of the property, such as the condition, the features, the defects, the repairs, the improvements, the hazards, and the regulations. The inspections and disclosures are important because they inform and protect both parties from any surprises or problems that may affect the value, the safety, or the enjoyment of the property.
The inspections and disclosures involve several steps, such as:
- Ordering the home inspection, which is the document that shows the general condition and the functionality of the property, such as the structure, the systems, the appliances, and the components
- Ordering the specialty inspections, which are the documents that show the specific condition and the issues of the property, such as the roof, the foundation, the plumbing, the electrical, the heating, the cooling, and the environmental
- Ordering the home warranty, which is the policy that covers the repair or the replacement of the systems and the appliances of the property in case of a breakdown or a malfunction
- Providing the seller disclosures, which are the documents that show the seller’s knowledge and the experience of the property, such as the material facts, the defects, the repairs, the improvements, the hazards, and the regulations
- Providing the natural hazard disclosures, which are the documents that show the potential risks and the dangers of the property, such as the earthquake, the flood, the fire, the landslide, and the radon
- Providing the lead-based paint disclosures, which are the documents that show the presence and the hazards of the lead-based paint in the property, if it was built before 1978
The buyer and the seller are responsible for reviewing and approving the inspections and disclosures. The buyer and the seller are also responsible for negotiating and agreeing on any repairs or improvements that are needed or requested based on the inspections and disclosures. The buyer can cancel the transaction and get a refund of the earnest money if the inspections or the disclosures reveal any problems or issues that cannot be resolved or accepted.
5. Ordering Hazard Insurance
The fifth step of the escrow process is ordering the hazard insurance. The hazard insurance is the policy that covers the property and the contents from any losses or damages that may result from fire, theft, vandalism, or other perils. The hazard insurance is also known as the homeowners insurance or the property insurance.
The hazard insurance is ordered by the buyer from an insurance company, which is a company that provides and sells the insurance policies. The insurance company determines the premium and the coverage of the hazard insurance based on the value, the features, and the location of the property. The insurance company also conducts an inspection of the property to verify its condition and its eligibility for the hazard insurance.
The buyer is responsible for providing the proof of insurance and the payment of the first year’s premium to the escrow agent, the seller, and the lender. The buyer is also responsible for maintaining and renewing the hazard insurance throughout the ownership of the property. The hazard insurance is required by the lender as a condition for approving the loan, as it ensures that the property will be protected from any losses or damages that may affect its value or its security.
6. Reviewing and Signing Closing Documents
The sixth step of the escrow process is reviewing and signing the closing documents. The closing documents are the documents that finalize and formalize the transaction, such as the deed, the note, the mortgage, the settlement statement, and the escrow statement. The closing documents are prepared and provided by the escrow agent, the lender, and the title company.
The buyer and the seller are responsible for reviewing and signing the closing documents. The buyer and the seller must ensure that the closing documents are accurate and complete, and that they reflect the terms and conditions of the purchase agreement and the loan approval.
The buyer and the seller must also pay attention to the closing costs, which are the fees and charges that are associated with the transaction, such as the escrow fees, the title fees, the loan fees, the recording fees, the transfer taxes, and the prorations. The buyer and the seller must agree on how to split and pay for the closing costs, unless otherwise specified in the purchase agreement or the loan approval.
The buyer and the seller can sign the closing documents in person at the escrow office, or they can sign them electronically or remotely, depending on the availability and the preference of the parties. The buyer and the seller must sign the closing documents before the closing date, which is the date that is specified in the purchase agreement as the deadline for completing the transaction.
7. Recording and Transferring Title
The seventh step of the escrow process is recording and transferring the title. The title is the legal right and the ownership of the property. The title is recorded and transferred by the title company, which is the company that handles and facilitates the title matters of the transaction.
The title company records the title by filing and registering the deed and the mortgage with the county recorder’s office, which is the local government agency that keeps and maintains the public records of the property. The title company transfers the title by delivering and releasing the deed and the keys to the buyer, and by delivering and releasing the payment and the mortgage to the seller and the lender.
The title company also issues the title insurance policy, which is the policy that protects the buyer and the lender from any losses or damages that may arise from a defective title. The title company also provides the final title report, which is the document that shows the updated and the current status of the title after the recording and the transferring.
The recording and the transferring of the title usually take place on the same day as the signing of the closing documents, or within one or two business days after the signing, depending on the availability and the efficiency of the county recorder’s office. The recording and the transferring of the title mark the official and the legal completion of the transaction.
8. Disbursing Funds and Documents
The eighth step of the escrow process is disbursing the funds and documents. The funds and documents are the money and the papers that are involved and exchanged in the transaction, such as the loan funds, the earnest money, the closing costs, the escrow fees, the title fees, the deed, the note, the mortgage, the settlement statement, and the escrow statement.
The funds and documents are disbursed by the escrow agent, who is the third party who holds and distributes the funds and documents according to the instructions of the buyer and the seller. The escrow agent disburses the funds and documents by:
- Wiring the loan funds from the lender to the escrow account
- Wiring the payment from the escrow account to the seller and the existing lender, if any
- Wiring the commission from the escrow account to the real estate agents
- Wiring the closing costs from the escrow account to the title company, the county recorder’s office, the insurance company, and other service providers
- Wiring the escrow fees from the escrow account to the escrow company
- Wiring the remaining funds from the escrow account to the buyer or the seller, if any
- Delivering the deed, the note, the mortgage, the settlement statement, and the escrow statement to the buyer, the seller, the lender, and the title company
The escrow agent also provides the buyer and the seller with a final closing statement, which is the document that shows the breakdown and the summary of the funds and documents that were disbursed in the transaction.
The disbursing of the funds and documents usually takes place within one or two business days after the recording and the transferring of the title, depending on the availability and the accuracy of the funds and documents. The disbursing of the funds and documents marks the final and the practical completion of the transaction.
9. Moving In or Out
The ninth step of the escrow process is moving in or out. This step applies to both the buyer and the seller, who are the parties who occupy and vacate the property. The moving in or out is the process of relocating and settling in or out of the property, such as packing, transporting, unpacking, cleaning, decorating, and arranging.
The buyer and the seller are responsible for moving in or out of the property according to the terms and conditions of the purchase agreement, such as the possession date, the occupancy period, the rent-back agreement, and the personal property agreement. The buyer and the seller are also responsible for coordinating and communicating with each other and with the real estate agents, the movers, the utilities, and the neighbors.
The moving in or out of the property usually takes place within a few days or weeks after the closing, depending on the availability and the preference of the parties. The moving in or out of the property marks the physical and the emotional completion of the transaction.
10. Closing Escrow
The tenth and final step of the escrow process is closing escrow. This step applies to the escrow agent, who is the third party who manages and oversees the escrow process. The closing escrow is the process of terminating and concluding the escrow process, such as closing the escrow account, archiving the escrow files, and releasing the escrow liability. The escrow agent closes escrow by:
- Closing the escrow account and transferring the remaining balance, if any, to the appropriate party
- Archiving the escrow files and storing them in a secure and accessible location for future reference or audit
- Releasing the escrow liability and ending the escrow relationship with the buyer and the seller
The escrow agent also sends a thank you letter to the buyer and the seller, which expresses the gratitude and the appreciation for choosing and trusting the escrow company. The escrow agent also invites the buyer and the seller to provide feedback and referrals for the escrow service.
Conclusion
The escrow process and requirements can be challenging and confusing, especially for the first-time buyers or sellers. However, with the help of a reputable and reliable escrow company, title company, lender, and real estate agent, the escrow process and requirements can be simplified and streamlined. By following the best practices and tips that we have provided. We hope the escrow process and requirements can also be smooth and successful.
