What is Escrow and Who Pays Escrow Fees?

Escrow can be a very complicated process if you’ve never purchased a home before, but it is important to know that it is designed to provide protection for both the buyers and sellers as the transaction is ongoing. During this process, a certain amount of money is placed in the hands of a third party to ensure that the closing of the house is a smooth transition for everyone.

In most of Southern California including Ventura and Los Angeles County, the buyer and seller are equally responsible for escrow fees with a standard 50/50 split. In certain situations, the exact split can depend on where you live and the ability of your realtor to negotiate a favorable deal for you, whether you’re the buyer or the seller. The utilization of escrow ensures that no money changes hands between the relevant parties until everything within the transaction has been properly settled.

What is Escrow?

While escrow can be a complicated and highly detailed process, it’s actually a fairly straightforward process once you know more about the process and why it’s necessary. Both the buyer and seller are involved in escrow, as each party must pay a certain amount of money, typically 1-2 percent of the price of the home, to a third party as a means of entering into the final closing aspect of selling a home. The money that you place in escrow is referred to as earnest money.

The third party that receives this money can be anyone from an attorney or a person within the closing company that you’re working with. In general, escrow can be beneficial towards both the buyer and seller due to the amount of security it provides during the transaction. Placing money into escrow during the closing period is done to ensure that everything proceeds smoothly. For instance, if the buyer backs out at the last minute, the seller is provided with the buyer’s portion of escrow.

When money is in escrow, neither party can touch it, which saves you from making a costly mistake. If you provided the seller directly with some money before you’ve reached a final sale agreement and the seller backs out of the deal, you would lose everything that you gave to the seller, which is why escrow is considered to be essential towards ensuring a fair deal. The closing process is designed to put the final touches on the sale of a home, but there are many ways in which the deal might not come together that you need to be prepared for, which is what escrow is there to help you with.

As you progress through the closing process, the third party, or escrow officer, who has been put in charge of the money that you put in escrow will be updated with documentation that details each step that you’ve gone through during the closing of a home. Some of these steps can include repairs or a home inspection. Once every condition has been met by both the buyer and seller and the transaction has been completely finalized, the money that was put into escrow will be transferred to the seller and the buyer will be provided with full ownership of the home in question.

How Escrow Works

When you’re about to sell or purchase a home, it’s definitely recommended that you’re aware of all that the escrow process entails. The escrow process is oftentimes a lengthy one that begins when the seller accepts the offer that you’ve made on their home. Although you might believe that this acceptance of your offer indicates that the home is yours, the “closing” of a home requires several more steps to be taken before you finally get the keys to your new house.

Once the purchase agreement has been formally signed, your realtor will collect the check of earnest money from you that will be placed into an escrow account that will be held by a third party until the process is completed. This third party is impartial and is supposed to be specified in the contract that you’ve signed for the home.

The third party that you’ve selected as the manager for your escrow account starts out by collecting funds from both parties but will continue to be provided with every document that is passed between buyer and seller during the closing of the house, which can include such documents as the signed deed to the home as well as the documents that detail the loan you’ve been provided with.

Once the money from both parties has been placed into escrow, the lender that has provided you with a mortgage will make an appraisal of the home in question, the costs of which typically come directly from the buyer. If the appraisal of the home indicates that the value of the property is lower than the price you’re paying for it, the bank that offered you the mortgage will likely not agree to provide you with financing unless the seller reduces the agreed upon price for the home or you make up the difference in cash. If you do not have the cash, you could attempt to get a second appraisal, as it could come in at a higher value.

Once the bank has agreed to the mortgage, documents about the financing agreement will be drawn up by the bank, which details your closing costs, the specific loan amount, and the interest rate associated with this loan. It’s possible to negotiate better terms within this financing agreement, although you should only do so with the assistance of a realtor.

When the financing aspect of the closing process has been dealt with, it’s time for you to have the home inspected for any damages that you may want the seller to take care of. The seller and their agent will likely provide you with a list of some of the issues within the home, but this list isn’t typically exhaustive, which is why it’s recommended that you obtain a home inspection for just a few hundred dollars. If there are additional issues that require repairs, you should try to get the seller to either lower the price of the home for you to make the necessary repairs yourself or ask them to handle these repairs themselves before the purchase goes through. If the seller doesn’t agree to either of these options, you have the option of backing out of the purchase agreement.

After the home has been inspected, homeowner’s insurance, a title report, and title insurance will need to be obtained, each of which is required by law before you can buy a house. For any insurance plans you’re looking at, make sure that you shop around in order to get the best rate. If all other steps have been completed without either party backing out of the deal, you will receive what’s known as a HUD-1 form, which is a finalized statement detailing the loan and any closing costs you will need to pay. You should have received a “good faith” estimate by the lender of your loan earlier in the closing process, which should be compared against the HUD-1 form to ensure that they are very similar, as you don’t want to pay any costs that you don’t have to.

It’s now time to close escrow, which unfortunately requires you to sign a large amount of paperwork (although our professionals at Nicki & Karen Southern California Luxury Real Estate can assist you with this). Once everything has been signed by both the buyer and seller, the third party in charge of the escrow accounts will prepare the deed for the house and send it to the recorder of deeds in whichever county the house is situated in. The buyer will then pay the closing costs and down payment to the escrow manager, who will also receive the loan funds at this time. All of these funds will then be transferred from the escrow manager to the seller and you will receive the keys to your new house!

How Much Are Escrow Fees?

The escrow fees associated with closing on a house are extensive and can be difficult to parse through if you’ve never purchased a home before now. Although it can depend on where you live in California, the escrow fees are typically split 50/50 between both the buyer and seller. In general, the fees amount to 1-2 percent of the price of the home, but the seller will typically be required to pay some additional fees for the owner’s title as well as the county transfer tax, the latter of which equates to $1.10 for every thousand of the purchase price in each county within California. When you’re attempting to find out who pays for what when it comes to escrow, you should consult this guide that provides you information on how much the buyer and seller pay for escrow in each county throughout California. For instance, if the home is in Los Angeles County, the split is 50/50 between the buyer and seller, while the seller is required to pay the entire escrow fee in Sacramento County.

When it comes to the escrow fees that you’ll need to pay, they are different for each escrow company, although they typically range from $1.75 to $2.75 per every thousand of the purchase price. Along with these fees, you will also need to pay a base fee of around $200-$400 depending on the escrow company you use. However much you are required to put into an escrow account, the seller will need to put in the same amount.

After all documents have been signed, the cash that was placed by the buyer in their escrow account will go to the seller and come off of the price of the home. In general, the escrow fee that you’ll need to pay is just one of many closing costs and fees that you will need to pay at closing. These costs include everything from homeowner’s insurance and transfer faxes to a courier fee and origination fee. Paying the escrow fees means that you’re in the last phase of buying or selling a home.

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When you’re getting ready to start the home buying or selling process, contact Nicki & Karen today if you have any questions about the escrow process!