Everything about the Escrow Process

Many people have seen the words “in escrow” accompanying a “for sale” sign on a listed real estate property, but what does “in escrow” really mean exactly?


What it means is that the Seller has accepted an offer from a buyer to purchase the property and both parties have entered a process that will be handled by an escrow company. Like with most real estate transactions and unlike most purchases for goods and items, a buyer can’t take possession of the property the day the offer is accepted, while at the same time, the Seller cannot have access to the purchase funds. Therefore, the sale is technically NOT finalized.


Here is what is needed:

• There has to be a contingency period where the buyer may order inspections on the property to make sure the property is free from major flaws, infestations or debts (relative to the buyer’s level of acceptance).
• If the Buyer is using a loan to purchase the property, the Buyer will need time to go through a loan application process and give the lender a chance to also inspect the property (since they will have an interest in the property as collateral).
• Also, the deed to the property must change hands from the seller to the buyer and recorded with the county where the property resides (a process that may also take several weeks to complete).

As you can see, there are several processes (among many others) that must take place before the sale is considered final and the property is considered “sold.” This is where escrow comes in, as the Escrow holder will oversee much of these processes.
Escrow is a neutral third party that will hold the purchase funds on behalf of the buyer (to make sure funds do not go to the seller until the property is transferred to the buyer) and the seller (to show that the buyer is making a commitment to making the purchase). However, it is important to note that Escrow does more than just hold the buyer’s funds.

So how does the escrow process begin?
Once a buyer’s offer is accepted by the seller, the process of escrow starts when both parties agree on which escrow company it wants to use for their transaction. The selected escrow company will then generate a document known as “Escrow Instructions” which will serve as written instructions for the escrow company throughout the entire process on how and when to disburse the purchase funds.
After both parties approve and sign the escrow instructions, the buyer will then proceed to deposit an initial down payment into the escrow company’s trust account (usually representing 3% of the purchase price) for the escrow holder to hold on to. Once the Escrow Holder receives the signed escrow instructions and the buyer’s initial deposit, escrow is now considered “open.” At this point, the listing agent for the home will probably proceed to update his/her advertising for the property to say that the sale is “pending” or “in escrow.”

Conditions of a Mortgage

After you apply for a mortgage and your mortgage professional submits your application for approval, the underwriter may ask you to clear certain conditions before making a decision. To fulfill these conditions, you usually need to supply additional documents to clarify financial facts within a specified period of time.

Features

• An approved mortgage usually comes with a few conditions set by the underwriter. At this stage, the underwriter usually provides you with a checklist of borrower conditions that you need to satisfy before getting a full approval. These conditions often require you to provide additional documents containing explanation, correction and verifications. Satisfying these conditions may take time because you often need to obtain documents from third parties.

Examples

• If you don't have credit histories or scores, the underwriter may ask you for payment history of utilities, such as gas and electricity. If you have unconventional income sources, you may have to get an accountant to prepare a profit and loss statement. The underwriter may also ask you to explain or correct inconsistencies in credit reports, tax statements and pay stubs. Other possible conditions include verifications of employment and income, housing history and letters from donors who provide you with funds.

Timing

• Satisfying the mortgage conditions is the stage that delays the approval of most loans. Many times, this is because various third parties take longer than expected to produce the documents you need. For example, your place of work may be going through a busy period and take more than one week to provide a verification of employment. If you have bad debt, it also takes time for you to clear the collection account and obtain relevant documents.

Clear to Close

• Once you satisfy all the conditions, the lender issues a clear to close, which means the lender will soon be ready to provide the mortgage funds. It usually takes two to three days from a clear to close for the lender to process your funds. Aiming to get a clear to close at least one full week before closing provides you with enough time in case it takes longer for the lender to process your funds.

I want to buy a Home... What do I do now?

Here are some of the first steps on what to do when you are ready to purchase your First Home... I will go into detail in a different post.

The first thing you want to do is find out how much you'll be able to afford so you can have a price range in mind.  You need to talk to a Mortgage Lender first, the most common mistake people make is they think, well, I want to buy a house, I'll call a Realtor... Well, that is not the best first step.  If you have a good realtor, most likely he or she will send you to get pre-qualified or pre-approved for a mortgage.  Really, nobody wants to be wasting time.  You don't want to go see a home that you might not be able to afford or he doesn't want to be showing you houses, taking you around town when you are really not sure if you are going to buy anything soon.

Choosing your Mortgage Lender; You want to look at your local bank first, people are afraid to go their own bank sometimes because they think the process is too long or they simply don't know that they do offer mortgages.  Ask, most Banks and Credit Unions now offer Mortgage loans.  Some banks offer no fees, (not all of them, and you have to keep in mind that there is no such thing as free lunch either, they will charge you somehow, either in the interest rate or application fee).  Other banks offer concessions, maybe if you have a checking and savings account they do offer you a discount.  If you have direct withdrawal you might also get a discount.  It will all depend on the institution.  It does not hurt to ask.  Keep in mind not all institutions offer these benefits.   You can also ask friends and family and see where they have gotten their mortgage loan from, they are your best chance if you are unsure on where to get a mortgage loan from.  Talk to the loan officer, if she or he was able to explain the types of loans, downpayment, loan fees, the process, time frames, you have to go to a meeting with lots of questions.  Loan Officers like that,  you need to ask, so don't be afraid to bring a notebook with questions if you need to.  Ask about rates, monthly payment... how much will you be qualified for?  Now, don't make the mistake a lot of people do.  Don't get into too much.  Nobody else than you knows how much you really can afford.  If you know you can only do $1000.00 a month, and your loan officer tells you, you qualify for a payment for up to $1500.00 don't go for it... you have to consider that your mortgage payment is only one of the many new payments you will have, specially if you are not used to paying utilities, maintenance and such.  So be honest with yourself and be wise.  Don't over do it.  That's the main reason why there are so many foreclosures in the United States at the moment.

Now, you are ready to go house shopping.. This will be a very fun time but could be really stressful and at the same time discouraging.  Specially if you are looking at houses weeks after weeks and you can't find anything you like!  Yes! Hire an agent... he or she will be your best friend for the next few weeks or months...  It will have to be somebody you will be comfortable with so choose wisely, again, ask advise from your friends, relatives or co-workers.  If all fails look in the real estate book and call an agent.  This agent can usually show you any house that is available for sale through a Real Estate Agency.  Depending on the State you live, You do not have to pay your agent unless you are selling a home or they tell you they charge for their services, they usually get paid once they sell the home and they do get a percentage from the sale.  Tell them how much money you are pre-approved for and whom you are working with as a lending institution.  It is your choice on how much you want them involved in the loan process, basically both the Lender and the Real Estate Agent work for you, they are both working to get you in your house as fast and easy as possible.  The agent will be the contact in between you and the selling agent.  It is best if you don't have the same agent working for both buyer and seller, it is kind of a conflict of interest and really as much as you can you want to try to avoid that.

Once you have found a house go back to your lender and give them or have your realtor send them the purchase and sale agreement.  This will get started with the loan process.  This process depending on the institution will take between 30 - 60 days.  Don't fret, this is just normal for these times.  Be prepared to be asked for a LOT of paperwork.  You will wonder, why do they need that?  Well, you have to remember, in times like this, Banks have gotten really tight and have more and more guidelines and things change basically daily, so don't be surprised if they ask you:  Where did that $25.00 deposit come from?  Really, it has happened.  True Story in times like these.  Try to give your lender all the information they request in a very timely manner and if you have questions ask them, but usually there is a big reason for them to ask for a certain document.  Will explain the Loan process in a different Post.

When the loan is approved, and closing documents are sent to Escrow.  You will go sign your final loan documents.  These will be:  the lender disclosures, the Note and Deed of Trust and some closing and state disclosures.  You will most likely not get your keys that day.  Again, depending on the State you are in.  Usually you will get keys to the house the day that your money is wired to Escrow and Loan is Funded and Deed of Trust Recorded.