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.”

Why do I need Title Insurance?

Why do you need title insurance?


To protect possibly the most important investment you'll ever make - the investment in 
real estate.


A lender goes to great lengths to minimize the risk of lending money for the purchase of real estate. First, credit is checked as an indication of the borrower's ability to repay the loan. 


Then, the lender seeks assurance that the quality of the title to the property to be acquired and which will be pledged as security for the loan is satisfactory. The lender does this by obtaining a loan policy of title insurance.


The loan policy does not protect the borrower.


The loan policy protects the lender against loss due to unknown title defects. It also protects the lender's interest from certain matters which may exist, but may not be known at the time of the sale. 


But, this policy only protects the lender's interest. It does not protect the borrower. That is why a real estate purchaser needs an owner's policy, which can be issued at the same time as the loan policy, usually for a nominal one-time fee. 


What is the danger of loss?


If the lender has title insurance protection and the owner does not, what possible danger of loss exists? 


As an example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien, or beneficial interest. The lender acquires title insurance protecting the lender's interest up to $80,000. But the purchaser's down payment of $20,000 is not covered.


What if some matter arises affecting the past ownership of the property? The title insurance company would defend and protect the interest of the lender. The purchaser, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title. 


The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The purchaser loses the down payment, other equity in the property that may have accumulated, and the property. And the balance on the note is still due!

How can there be title defect if the title has been searched and a loan policy issued?

Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners.  In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.

What title insurance protects against?

Here are just a few of the most common hidden risks that can cause loss of title or create an encumbrance on title:

* False impersonation of the true owner of the property
* Forged deeds, releases or wills
* Undisclosed or missing heirs
* Instruments executed under invalid or expired power of attorney
* Mistakes in recording legal documents
* Misinterpretations of wills
* Deeds by persons of unsound mind
* Deeds by minors
* Deeds by persons supposedly single, but in fact married* Liens for unpaid estate, inheritance, income or gift taxes
* Fraud

What protection does title insurance provide against defects and hidden risks?
Title insurance will pay for defending against any lawsuit attacking the title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect as long as the insured, or the insured's heirs, retain an interest in the property, or have any obligations under a warranty in any conveyance of it.
Owner's title insurance, issued simultaneously with a loan policy, is the best title insurance value a property owner can get.

What is an Escrow Account?

An escrow account is used to collect and hold funds to pay your property taxes, homeowners insurance premiums or other charges when they become due.

The account is often established for you by your mortgage company when you take out your mortgage.  However, if an escrow account was not set up when you took out your mortgage, you may be able to do so now. 

Real estate taxes and insurance premiums must be paid regularly — typically, payments are due once or twice a year — and failure to pay these bills on time may cost you money in tax penalties or result in cancellation of your insurance coverage.

What are the benefits of an escrow account?

An escrow account helps you:

• Manage your budget: You do not have to make lump sum payments when your taxes and insurance are due. You have made monthly payments throughout the year to cover those obligations.
• Gain peace of mind: You don’t need to keep track of when your tax and insurance bills are due.  The payments will be made, on time, on your behalf.
• Ensure that your home is protected: With paid-up insurance coverage and taxes, you protect your investment in your home and meet your lender’s requirements.

Most mortgage companies require an escrow account for mortgages with less than a 20 percent down payment.

How does an escrow account work?

Your monthly mortgage payment includes an amount for property taxes and insurance in addition to the amount you owe for principal and interest.

The amount of your monthly mortgage payment that is for taxes and insurance is placed by your mortgage company into an escrow account. The funds can be used only to pay taxes and insurance on your behalf.

Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company examines any changes in your tax and insurance costs (for example, your local government may change the amount of your real estate taxes). Your mortgage company sends you a statement each year showing the prior year's activity — amounts collected from you and placed in escrow as well as the payments made on your behalf — and showing any adjustments that may be needed based on changes in your tax and insurance costs.   

Here is a simplified example* of how escrow payments are calculated:
Annual real estate taxes: $1,800 ÷ 12 months = $150 per month
Annual property insurance: $720 ÷ 12 months = $60 per month
Total monthly taxes and insurance: $210

So in this example, $210 would be added to your total monthly mortgage payment and applied to your escrow account. You might hear your total monthly mortgage payment referred to as your “PITI” — forprincipal, interest, taxes and insurance.

Do you have an escrow account?

If you are not sure if you have an escrow account, check your monthly mortgage account statement or contact your mortgage company.  Your account statement will typically indicate your “Escrow Balance” and the amount of your total monthly mortgage payment that is applied to escrow.

Should you establish an escrow account?

If you do not have an escrow account, you may want to establish one. Ask your mortgage company for more information.

Want more information?

For more information, talk with your mortgage company to determine if you are setting aside adequate funds in your escrow account or if you should set up an escrow account. Also, the U.S. Department of Housing and Urban Development offers "Frequently Asked Questions about Escrow Accounts for Consumers".

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.