Buying and selling real estate is full of many complications that most people simply are not prepared for. One of the greatest ambiguities for many is the escrow process -- or closing -- which occurs between the seller accepting the Purchase Agreement and the buyer getting the keys to the property. Following is an overview of the escrow process so you can understand the process we will manage and remain informed throughout.
1. Escrow is opened
Once the buyer and seller sign a Purchase Agreement, an agent will collect earnest money and deposit it in an escrow account at the escrow company specified in the agreement. The escrow company is important because it serves as a neutral third party to collect the funds and documents involved in the transaction.
It is typically the real estate agent who delivers the signed purchase agreement to the escrow company. Upon receipt, the escrow officer will assign the transaction an escrow number. The broker will also provide the escrow officer with information about the transaction, including names and contact information, lending and title information and other important details.
2. Waiting for bank approval
The bank that will provide the loan will conduct its own appraisal of the property, paid for by the buyer, to protect its interests in case a foreclosure is necessary down the line. If the appraisal is lower than the offered price, the lender will not provide financing until the buyer brings more cash to the table or the seller lowers the price.
It may be possible to change the appraiser's mind or get a new appraisal on the property. In some cases, providing additional information about the home or going with a different lender can work.
3. Obtaining financing
The buyer gives the lender the property address, and the lender will prepare a good faith estimate, which details the loan amount, closing costs, interest rate and other costs associated with the purchase of the property.
4. Approving seller disclosures
In the next step, the buyer receives written notification of any problems identified by the seller or the seller's agent. This includes work done in violation of housing codes.
5. Obtaining inspections
There are usually several inspections that should be conducted on the home before escrow can be closed. A home inspection, while not required, is a smart decision for buyers to identify any potentially dangerous or expensive defects in the home. Some lenders require pest inspection and environmental inspections, and areas subject to earthquakes may need a soils report to assess the risk. Areas in flood-prone areas may also need a flood report. If a property is very likely to flood, the buyer will be unable to obtain homeowners insurance, and thus be unable to secure financing.
6. Obtaining hazard insurance
Hazard insurance includes homeowners insurance and other coverage necessary, such as flood insurance.
7. Acquiring the title report and title insurance
Both are required by the lender prior to closing escrow. The title report is required to ensure the property's title is clear with no liens. Title insurance protects the buyer and lender from legal challenges that may arise if something did not show up during the title search.
If there is a problem with the title, the seller must have it corrected for the sale to proceed.
8. Final walk-through of the property
Before closing, the seller will do a re-inspection of the property to make sure no new damage has occurred and that the seller left behind any items specified in the agreement.
9. Reviewing the HUD-1 form
Just before closing, the buyer and seller will receive an estimated settlement statement and HUD-1, which is the estimate iterating the monetary terms and closing costs.
Buyers should compare this to the good faith estimate provided earlier by their lender.
10. Escrow is closed
At closing, there will be a great deal of paperwork to sign for both the buyer and the seller. Once the paperwork is complete, the escrow officer will prepare a new deed and send it to the county recorder. A cashier's check or wire transfer will be provided to pay the down payment and closing costs and the lender will wire the loan funds to escrow.
Your escrow officer will manage every aspect of the process and ensure all paperwork is complete and funds received.