Purchasing a new home makes for a lengthy and time-consuming process that involves numerous factors that aren’t always easy to understand. One such factor is the escrow process, which is commonly referred to as closing. The closing of a home begins when the seller decides to accept an offer and lasts until the buyer is provided with the keys. Escrow is a kind of financial instrument that’s held directly by a third party while the primary transaction is being completed. This trust account is held until every buyer and seller obligation is fulfilled.
Throughout this process, your real estate agent will assist you in making sure that everything is in order. While it’s possible for an escrow management account to be created during this process, this type of account is usually only necessary for attorneys and property managers who are tasked with handling the escrow funds of multiple clients. In the majority of situations, this process will take around 30 days or less to be completed. However, it’s possible for escrow to last anywhere from 30-60 days if there are delays or some other issues during escrow. This article provided a comprehensive look at the steps that occur throughout the home escrow process.
Key Takeaways:
- The escrow process, commonly known as the closing process, is based on a financial instrument through a third party.
- The next step of the escrow process is the bank appraisal which is usually paid for by the buyer to protect their financial interest.
- When closing escrow you will be provided with a HUD-1 form with details of final closing costs and loan terms.
Opening an Escrow Account
The first step of this process involves opening an escrow account. After the seller and you have come to an agreement and have officially signed a contract, the escrow account will be opened with the earnest money check that you provide to your agent. This check is deposited into an account at an escrow company, which will be named within the purchase agreement. Keep in mind that the earned money deposit is considered to be a “good faith deposit”, which indicates that you are serious about purchasing the home. This is considered to be a portion of the overall deposit that you provide.
Throughout the escrow process, the third party will obtain all of the necessary documents and funds that are required to be collected before the closing of the home can be completed. These documents and funds include everything from the earnest money deposit to the deed of the home. While escrow companies typically handle this process, it’s possible for an attorney to do so as well. When this occurs, the process is usually referred to as a settlement.
Waiting for the Bank Appraisal
The next step in this process involves waiting for the bank appraisal of the home. The appraisal is typically paid for by the buyer and is designed to allow the bank to protect their financial interest in the event that the property ever needs to be foreclosed on. If you find that the appraisal sets the value of the home at a price that’s lower than the price you offered, the lender won’t provide financing unless the seller reduces the price of the home or you make up the difference.
It’s possible, however, to make a claim that the home is worth more than the initial appraisal. You can attempt to change the mind of the appraiser by:
- Obtaining a second appraisal
- Going to another lender to obtain an additional appraisal
- Providing more information on why you feel like the home is worth more than it was appraised for
If none of these methods work, it’s possible for you to cancel the original purchase contract.
Securing Financing
The next phase of the escrow process involves securing financing. While it can be difficult to secure financing at reasonable interest rates, you should have obtained a pre-approval letter before you ever started searching for a home to buy. This letter gives you a good faith estimate that identifies how much the lender is willing to provide to you in a loan, the estimated closing costs, and the interest rate that you will likely receive.
You should negotiate some of the details provided to you in this estimate before signing a loan commitment. This is a commitment by the bank to lend to you. When the loan commitment has been signed, the financing contingency can be removed and the escrow process can continue.
Discussing the Seller’s Disclosures
It’s at this point of the process that the seller’s disclosures will be discussed, which are issues with the property that the seller is notifying you about. In some neighborhoods, garages will be converted into living areas even when this conversion is in violation of the housing codes in the city. In most situations, these problems will have been mentioned when the home was placed on the market, which means that there shouldn’t be any surprises.
This aspect of the process is important when finalizing a home because it allows you to gain a deeper understanding of what your money is going to when you buy the property. Some properties may come with a type of no seller disclosure, which means that the seller won’t provide additional details within the terms of the sale. Once you have been given seller disclosures, you may want to request that a home inspection be done. This inspection will give you a more thorough understanding of every issue with the condition of the home. For instance, there could be water damage that you want the seller to correct before the home is closed on.
There are several types of inspections that you can request at this point, which include:
- A standard home inspection that looks at defects of the property
- An environmental inspection that searches for signs of radon, mold, and asbestos
- A pest inspection that looks for carpenter ants, termites, and other pests
- Additional inspections like a flood report or land survey
Paying Homeowners Insurance
When you have ordered any necessary inspections of the property that you’re about to buy, it’s time to pay for homeowners insurance, which is required when obtaining a mortgage of any kind. Keep in mind that additional insurance may be necessary depending on the location of the property in question. For instance, most buyers who are purchasing a home that’s located within a flood zone will be required to purchase flood insurance.
Homeowners insurance is necessary until the full loan has been paid off on the home, which could be anywhere from 15-30 years. While the bank will typically select a homeowners insurance policy for you, it’s possible that you will be able to obtain better rates when you shop for a policy on your own. When conducting this search, make sure that you compare the terms of each insurance policy that you look at.
Title Report and Insurance
Now it’s time for the title report to be drawn up and for insurance to be purchased. These aspects of the escrow process are necessities for the lender and can provide you with peace of mind that the transaction will be completed without issue. A title report ensures that the title of the home is completely clear, which means that no liens can be found on the property and that only the seller has claim to the property in question.
As for title insurance, this type of insurance is essential to protect the lender and you from possible legal challenges that could occur in the event that something wasn’t caught when the title was looked at. While the lender should identify any problems with the title of the home, it’s still important to have protection from even the smallest and most unlikely of issues.
If any issue exists with the title, the seller will have time to correct the problem. They could also allow you as the buyer to walk away from the contract. While the escrow company isn’t always involved in this process, it’s important to understand that escrow companies are considered to be title companies in certain locations.
Closing Escrow
The final aspect of the home escrow process involves closing escrow. It’s around this time that you will be provided with a HUD-1 form, which is a statement that details the final closing costs and loan terms. Make sure that you compare this form to the good faith estimate that was signed earlier on in the process. These documents should appear to be very similar. If there are any mistakes or unexpected fees in the final document that you receive, these issues should be brought up with the lender so that you can be certain that you aren’t paying too much on the property.
As the buyer, you might also want to conduct a final walkthrough of the home at this time. This walkthrough is oftentimes necessary for buyers to be confident that no extra issues are present in the home since the contract was signed. If the seller has agreed to leave you certain items, you can make sure that any appliances and fixtures that were supposed to remain in the home are still there. Consider performing this walkthrough with the seller, which will allow you to easily notify them of any problems that you might find.
There are just a few additional steps that are needed before the home will be fully in your possession. While these steps can vary from state to state, they usually involve signing a substantial amount of paperwork. Make sure that you look through all of this paperwork carefully before signing it. Once every paper has been signed, the officer involved with escrow will prepare an entirely new deed that designates you as the owner of the property. The deed will then be sent over to the county recorder.
The closing costs and down payment amount that you agreed to will be sent by wire transfer or cashier’s check at this time. As for the lender, they will send all funds to escrow, which will allow the seller to be paid. When you have reached this stage of the home escrow process, you will finally be able to enter the home and take possession of it.
While the home escrow process can be lengthy and relatively complicated, most of the issues that are handled throughout this process will be performed by the lender or your real estate agent. Many buyers will take some of this time to pack all of their belongings in anticipation for closing day. Once you have the keys to the home in hand, you can celebrate as the owner of a new home.