Closing the deal

What Is Escrow?

It is customary and prudent for a buyer and seller to have a third, disinterested party to assist them in carrying out the terms of their agreement. In California, this procedure is known as an escrow. When opening an escrow, the buyer and seller establish terms and conditions for the transfer of ownership of property. Your escrow is created shortly after you execute the contract to purchase your home. The escrow becomes the depository for all monies, instructions and documents. The Escrow Officer has the responsibility of seeing that all terms of the escrow are carried out.

NOTE: In some states, the process of completing the purchase of a home is known as the "Settlement" process. Often the seller and buyer will come together at the Settlement table where documents are signed and exchanged. There may be a settlement attorney who facilitates this process. In California, the term "Escrow" is used to describe the process of completing the sale of property.

How does the escrow process work?

The escrow holds all monies, instructions and documents for the purchase of your home, including your down payment funds and your lender’s funds and documents for the new loan. The escrow officer takes instructions based on the terms of your purchase agreement and your lender’s requirements. The escrow officer can hold inspection reports and bills for work performed as required by your purchase agreement. Other elements of the escrow include hazard insurance, title insurance and the grant deed from the seller to you. Escrow cannot be completed until the instructions (requirements) have been satisfied, and all parties have signed escrow documents.

The escrow holder’s duties include:

• Serve as the neutral agent and the liaison between all parties involved.
• Prepare the escrow instructions.
• Request a Preliminary Title Search to determine the status of title to the property.
• Comply with the lender’s requirements as specified on its instructions to escrow.
• Receive and handle purchase funds from the buyer.
• Prepare or secure the deed and documents related to the escrow.
• Prorate taxes, interest, insurance and rents.
• Secure releases of all contingencies or other conditions imposed on the escrow.
• Record the deed and any other documents.
• Request title insurance policy.
• Close the escrow pursuant to instructions supplied by the seller, buyer and lender, if any.
• Disburse funds as authorized by the instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs.
• Prepare final statements for all parties involved that account for the disposition of all funds held in the escrow account.

How do I open an escrow?

Your real estate agent will open the escrow for you. As soon as you execute your purchase agreement, your deposit is given to the title company for deposit into the escrow account. How will you know where your money has gone? Written evidence of your deposit generally is included in your copy of your purchase contract. Your funds will then be deposited in your separate escrow or trust account and processed through your local bank.

Escrow Instructions

Escrow instructions define all the conditions that must occur before the transaction can be finalized. Your escrow instructions specify, in a debit and credit format, the disposition of your purchase funds. They also provide for title protection for your home.

What information will I have to provide?

You may be asked to complete a statement of identity. Because many people have the same name, the statement of identity is used to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is kept confidential.

The Loan Process

Step 1. The Application

The key to the loan process going smoothly is the initial application interview. At this time the loan officer obtains all pertinent information and documentation from the buyer so unnecessary problems and delays may be avoided. This is the best time to discuss loan programs best suited to meet the homebuyer’s needs.

Step 2. Automated Underwriting

After the application is completed, the loan officer inputs the application into the automatic underwriting system. This is an automated financial evaluation program that analyzes the data from the loan application of the borrower, such as income, credit history, debts, property details, debt-to-income rations, etc. This process evaluates the borrower’s financial picture and makes a credit decision. In conjunction with this review, the loan officer requests a credit report run on the borrower(s).

Step 3. Requesting Documentation

The next step after receiving the initial lending decision is that the loan officer will request certain documents such as bank statements, W2's (2 years), verification of funds, landlord details and any other supporting documentation that has been requested.

Step 4. The Homebuyer Goes into Contract on a Property

Step 5. Loan Submission

Once all of the necessary documentation has been acquired, the loan officer puts the loan package together and submits it to the underwriter for final approval. The final loan package includes the contract on the property, the property appraisal, preliminary title reports and any conditions that were identified in the automated underwriting process. The loan officer submits the final loan package to the underwriter for formal loan approval.

Step 6. Loan Approval

The underwriter reviews the contract, property appraisal and preliminary title reports and validates the conditions from the automated underwriting process. File disposition is achieved. Assuming all criteria are met, the loan is approved and/or other conditions may be requested as terms of funding.

Step 7. Rate Lock

The loan officer will discuss the loan programs available to the homebuyer(s) in conjunction with discussing the final loan approval and conditions. Based on the outcome of the property purchase and final loan approval process, the buyer may wish to or need to review other loan programs. A final loan program decision is reached and the request for rate lock is made.

Step 8. Documents Are Drawn

After the loan approval, the loan documents (including the note and deed of trust) are completed and sent to the title company. The escrow officer calls the borrowers to come in when the papers are ready for final signature. At this time, the borrowers are told how much money they will need to bring in to close the loan.

Step 9. Funding

Once all the parties have signed the loan documents, they are returned to the lender, who reviews the package. If all of the forms have been properly executed, the funds are then transferred. At closing, the borrower must present a cashier’s check or arrange for a wire transfer of funds directly to the title company for the required closing costs and payments. No personal checks are accepted. Also, funding conditions must be submitted and satisfactorily met at this time.

Step 10. Recordation

When the title company receives the funding check from the lender, the title company makes the lender’s security for the loan a matter of public record. This is done by recording both the note and deed of trust at the County Recorder’s office. Escrow is now officially closed.

Who Pays For What?

A major question in every escrow is: "Who pays what?" The answers vary by county ordinances and standard practices.  What is listed below are "customary" practices.  All fees charged are governed by terms of the sales contract and other written escrow instructions. Note: on some FHA, VA or other government-backed loans, the buyer will pay some fees that governmental regulations will not allow you to pay.

Sellers Generally Pay:

• Real estate commission
• Document transfer tax ($1.10 per $1,000 of sales price)
• Notary fees
• Property tax proration (to date of acquisition)
• Special delivery/courier fees, if required
• Document preparation fees
• Document recording charges
• Homeowner’s association statement fee and prorata dues
• Home warranty (according to contract)
• Work/repairs required (according to contract)
• Matters of record against the property or seller (loans, tax liens, judgments, etc.) and fees required to clear them (statement fees, reconveyance/trustee fees and prepayment penalties)
• Bonds and assessments (according to contract)
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