What Exactly Is The Escrow Process?

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When you’re on the hunt for a new home, the last thing you want to see is that a home you love is already in escrow. With enough patience and a little bit of luck, one day you will find yourself in escrow for your dream property. 

While you may have a hunch that being in escrow means a sale is almost a done deal, if you’re a first-time buyer, you may not have a clear picture of what the escrow process actually looks like. Let’s break down everything you need to know, including explaining what is close of escrow, the escrow process timeline, and how it all works. 

What is escrow? 

Typically, this third-party escrow service is mandatory once the buyer and seller agree to the sale of the home. They will choose a neutral third party to act as their escrow agent. This escrow agent will then collect the “earnest money” from the buyer — which is the buyer’s deposit on the property. Once the earnest money is in place, the seller removes their property from the market. While the buyer and seller take next steps to complete the sale of the property, the buyer’s earnest deposit and the seller’s home are both “in escrow” until the completion of the transaction—with the escrow account acting similar to a trust account.

What is close of escrow?

What the close of escrow looks like varies by state, but no matter where you live, you need to get ready to sign a lot of paperwork. Both the buyer and seller will have to review and sign a number of things in order for the escrow officer to prepare a new deed that names the buyer as the owner of the property. This deed will then have to go to the county recorder. 

To complete this process, the buyer will then submit a cashier’s check or undergo a wire transfer to pay for both closing costs and the down payment on the home. The buyer’s lender will then wire the loan funds to escrow. After that, the buyer will take possession of the property.

The close of escrow does not necessarily have to occur on the actual date of closing, but it can happen on that day. If the buyer will take possession of the home immediately on the closing day, they will likely receive a copy of the key at that time. 

How long does the escrow process take?

There is no standard timeline the escrow process needs to follow. The amount of time it takes to finish the process depends on how long it takes for the buyer to seek mortgage pre-approval (unless they sought pre-approval before they made an offer) and to secure financing. How long it takes for all parties to gather the proper documents can also vary.

If all goes well, it can take as little as 30 days to complete the escrow process, but it is also common for the process to take around 60 days to complete.

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What can go wrong during escrow? 

There are plenty of mishaps that lead to escrow roadblocks for the buyer and seller. Don’t worry if you do run into the occasional issue — one of the main reasons the escrow process exists is to resolve any problems between the buyer and seller before the completion of the transaction. Here’s three of the main hurdles you may have to overcome to complete the escrow closing process. 

Delays

Delays occur during the escrow process for many different reasons. For example, it may take a while to schedule a home appraisal or inspection, especially if the market is hot and there are a ton of real estate transactions happening at the moment. It’s possible to renegotiate the timeline for closing when these unavoidable delays arise. 

Contingencies

When you create the purchase agreement, the buyer (with the help of their real estate agent), typically inserts clauses that allow them to walk away from the sale and to keep their deposit. You’ll hear these clauses referred to as contingencies. Two examples of popular contingency clauses are when an appraisal reveals a home is worth less than expected or an inspection uncovers major issues with the home. Even if a contingency issue arises, the buyer and seller may be able to work them out and get the sale back on track, but these negotiations can extend the timeline. There is also a chance that the property will fall out of escrow at this point.

Title

If the buyer discovers a title issue, such as a lien that will cause problems after that sale, it will take additional time to clear up title issues or to purchase title insurance. When a title issue arises, it’s important to take it seriously. The title is what gives the homeowner legal right to ownership of the property. Not only does a buyer not want a title with issues, but they won’t want to purchase a home from a seller that may not have full legal rights to the home. If you clear up the title issues and move forward with the purchase of the home, you will gain access to the title and the deed of the home. 

Is the escrow process a standard part of home buying? 

Most homes for sale will undergo the escrow process before the seller transfers ownership of the home to the buyer. The escrow process as a whole is very important, as it provides protection and guarantees for the buyer and seller, as once a property is in escrow, the seller and buyer won’t receive anything from the escrow company until they meet all purchase agreement conditions. For example, a condition on the sale of the home may be that it has to pass a safety inspection. Sometimes the seller must complete repairs or the home will need to undergo property tax audits. 

During the escrow period, the seller will know that the buyer intends to and can afford to complete the purchase of the home because of the earnest deposit made by the buyer. If the buyer fails to hold up the terms of the contract or backs out of the sale, that earnest deposit may end up forfeited to the seller. Because of this risk, the buyer is typically pretty set on the purchase of the home at this stage of the game.  

So, who pays escrow fees? Typically, the buyer and the seller split these fees, but both parties can come to an arrangement that one party pays for all of the escrow fees. There is no set rule that determines who has to pay, so your real estate agents will help you come to an agreement. 

The escrow agents also ensure that money from the sale ends up distributed fairly to the involved parties that aren’t the buyer or seller, such as commissions for the real estate agent, prepaid mortgage interest for the lender, or recording fees to the county office of records. The escrow agent may also take their own fee out of these funds. 

Even if it seems somewhat tedious, the escrow process does streamline the home sale process, keeps all parties organized, and provides much needed protection for both the buyer and the seller. 

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