Real Estate FAQ: What is Escrow?
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A commonly asked question when buying a house for the first time is what is escrow? The actual definition for escrow is “a bond, deed, or other document kept in the custody of a third party, taking effect only when a specified condition has been fulfilled.” Essentially, escrow is a company hired to act as a third party that handles the funds that are transferred from the buyer to the seller and coordinate the closing process of a house. They keep everyone on track for closing and handle all of the funds.
The escrow company records the new deed with the title company once it is closed. The escrow agent can be an escrow company, an attorney, a trust company or a title company. The escrow officer or closing agent will be given instructions on how to handle each transaction.
There is an escrow fee that is usually paid by both the seller and the buyer. If the seller is paying the buyer’s closing costs then the seller will be paying all of the escrow fees. A buyer who is using a VA loan is not allowed to pay any of the escrow fee and an FHA loan is allowed to pay up to half of the escrow fees.
What is the escrow process?
- After you have a mutual contract between the buyer and the seller your real estate broker will send the contract to whichever escrow company you agree on which is written on the first page of the purchase and sale agreement.
- Your real estate broker will collect your earnest money check to give to escrow or have you drop off the earnest money check to the escrow company. Usually, the broker will do whatever is most convenient for you.
- Now the escrow company is in a holding point while the bank orders the appraisal. They will collect any addendums that are signed in the process such as the signed-off inspection report. Once the appraisal comes back the bank can move forward on the loan.
- Escrow will be working with the title company to review the title report to make sure the title is clear, meaning no liens and no one else owns the house. If anything is wrong with the title the seller will need to get that fixed before closing on the house.
- Now that all of the contingencies are done and the title is clear, escrow will prepare the HUD-1 which shows all of the terms and costs. You will want to review it to make sure there are no unexpected costs or mistakes.
- Closing is what comes next! You will go to your escrow company’s office and sign lots of paperwork. Make sure you take the time to read it and that you understand what you are signing. Both the seller and the buyer have papers to sign. They will have two separate signing appointments. If you are unable to get to the escrow office they have notaries that are able to come to you for a small fee. Once everything is signed your closing agent will prepare a new deed naming the buyer as the property owner. After they complete the deed they send it to the county recorder. The buyer’s lender will send the wire with the funds and you give a cashier’s check with your down payment or if you are paying cash.
- The final step is getting the recording numbers and the buyer now has possession unless it is closing plus a few days. Once you get possession you are free to move in and do whatever you want to do with the house.