What is an Escrow? How the Closing Process Works.
An escrow is a method of closing a real estate transaction. The escrow agent is given the responsibility to oversee and coordinate the closing activities, acting as a neutral third party between the buyers and sellers. The escrow agent may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution. Many states have laws that regulate escrow agents and limit who may serve in this capacity. Your escrow officer must follow the instructions of both parties (buyers and sellers) involved in the transaction, and will remain unbiased and rather formal when dealing with all of the parties associated with the escrow.
The Escrow Procedure
Real Estate transactions involve a tremendous amount of technical experience and knowledge. Your escrow officer will generally be responsible for properly safeguarding and distributing all monies involved in the transaction. The buyers and sellers come to an agreement that is acceptable to all parties (known as a purchase and sale agreement, or more commonly, an earnest money agreement). Once this agreement is signed by all the parties, your broker or real estate agent will turn over the earnest money agreement to the escrow company. This agreement gives the escrow officer specific steps to be completed in order for the escrow to be closed.
Common or typical escrow instructions include the following information:
- How the escrow officer will receive and hold the buyer’s money for the purchase of the property.
- The specific time frame set by buyers and sellers for the transaction to close.
- Particular requirements or specific actions that are to be performed by either party. The escrow officer cannot close until all agreements made have been satisfied.
- The authorization for the escrow officer to distribute funds for title insurance, real estate commissions, recording fees and other costs that arise.
- Instructions for paying taxes and insurance.
- If the escrow officer’s examination of the title report discloses liens against the seller or a lien for which the seller is responsible, the escrow instructions usually provide that a portion of the purchase price can be withheld from the seller and used to pay these liens and clear title so the transaction can be closed.
What the Seller Does in the Escrow Process
- The seller will deposit the deed that will convey the property to the buyer.
- The seller may provide evidence that a pest inspection has been done and that any work that is required by the purchaser’s lender has been completed.
- The seller may provide warranties for equipment or home warranty contracts.
- The seller will provide current tax bills or receipts.
- The seller will provide addresses of mortgage holders and the loan account numbers.
- Any other information that is needed from the seller will be addressed by the escrow officer.
What the Buyer Does in the Escrow Process
- The buyer will inform the escrow officer of the exact name(s) and the manner in which title is to be held.
- The name, address, and telephone number of the proposed lender will be given to the escrow officer.
- The balance of the funds needed to complete the transaction will be given to the escrow officer.
- The buyer will approve any inspection reports, title insurance commitments, etc., called for by the earnest money agreement.
- Any other specific conditions that are to be fulfilled in the escrow instructions by the buyer will be completed before closing.
What the Lender Does in the Escrow Process
- The lender provides loan documents to the escrow officer.
- The lender will deliver any borrowed funds to the escrow officer for distribution.
- The lender directs the escrow officer regarding the conditions under which the loan funds may be used.
What the Escrow Officer Does in the Escrow Process
- The escrow officer opens the order for title insurance and examines the title evidence. The escrow officer prepares to clear title by ordering payoffs for loans, contracts, liens, judgments, and taxes due or delinquent.
- Approval will be obtained from the buyer on the title insurance and pest inspection, etc.
- The lender or buyer provides the funds needed to close the transaction to the escrow officer.
- Funds are disbursed for real estate commissions, recording fees, title insurance, pest inspections, etc.
- The escrow officer prorates taxes (and rents, if necessary).
- A final HUD-1 statement is prepared for the buyer(s) and seller(s) by the escrow officer that discloses all the funds being disbursed and to whom.
- Documents are usually prepared by the escrow officer and recorded in accordance with lender loan instructions and loan documents.
- The escrow officer then delivers the warranty deed to the buyer and the funds to the seller upon the closing of the escrow.
Escrow fees charged by the escrow agent are typically split equally between the buyer and seller. A purchaser under new VA financing is not allowed to pay any escrow fees, in which case escrow fees are the sole responsibility of the seller. However, FHA regulations stipulate that the buyer may pay up to one half of the fees charged by the escrow agent.