Introduction
Buying a house can be a complicated process, one that most people are generally unprepared for and don’t really understand. There are a lot of different nuances to buying and selling a home, from the offer, to the home inspection, and getting that mortgage approval. One of those hard-to-understand elements is the process of being “in escrow”, which occurs between the time a seller accepts the offer and the buyer gets the keys to the new house. So how do you prepare for it? Here is a 10-step walk-through of the process, so you won’t be left standing in the rain without a roof over your head.
Key Takeaways
- The escrow process occurs between the time a seller accepts an offer to purchase and the buyer takes possession of the home.
- The first part of the escrow process is the opening of an account in which a deposit is held.
- The buyer must wait for bank approval, secure financing, get inspections completed, purchase hazard insurance, do walk-throughs, and go through closing.
- The buyer may walk away from the agreement if conditions are not met or there is a problem with the property.
The Process
1. Open an Escrow Account
Once you and the seller agree on a price and sign a mutually acceptable purchase agreement, your real estate agent will collect your earnest money—sort of like a good faith deposit which is ultimately applied to your down payment—and deposit it in an escrow account at the escrow company or service specified in the purchase agreement. An escrow account is managed by an outside party in order to hold valuables, such as money, property deeds, and personal finance documents, on behalf of two agreeing parties until specified conditions are met during a financial transaction. Depending on the reason for escrow, the escrow agent may be a title company that specializes in real estate, a bank or other financial institution, or an Arizona Escrow Company officer entrusted with the role.
The escrow company acts as a neutral third party to collect the required funds and documents involved in the closing process including the initial earnest money check, the loan documents, and the signed deed. In some areas, attorneys may handle this process instead of an escrow company, in which case it’s often called “settlement” rather than “escrow.”
2. Await the Bank's Appraisal
Your other options to try to change the appraiser’s mind are one of the following:
- Provide additional information on why you believe the home should be appraised at a higher amount.
- Get a second appraisal.
- Try going with another lender and hope that appraisal comes out in your favor. If none of these options is possible, you will be able to cancel the purchase contract.
3. Secure Financing
Agents often also include home sale contingencies in purchase contracts to prevent buyers from simultaneously owning two homes and paying two mortgages. This type of contingency gives a buyer a specified amount of time in which to sell his current home before closing escrow on a new home.
4. Approve the Seller Disclosures
5. Obtain the Home Inspection
You aren’t required to obtain a home inspection when you purchase a home, but it’s in your best interest to do so. For a few hundred dollars, a professional home inspector will tell you if there are any dangerous or costly defects in the home. If there are, you’ll want to know about them so you can back out of the purchase, ask the seller to fix them, or ask the seller to lower the price to handle the repairs yourself.
Notably, you cannot negotiate any seller concessions here if the contract says you will purchase the property “as is.” If the inspection process concludes satisfactorily, you will then need to remove the purchase agreement’s inspection contingency in writing. You’ll repeat this step after any other inspections.
Pest Inspection
If the lender does not require a pest inspection, you may still want to get one to ensure the house does not have termites, carpenter ants, or other pests such as roaches or rats. These problems may not be apparent during the daytime hours when you’ve most likely viewed the house and would be a terribly unwelcome discovery after you move in. If there are any pest problems, they will need to be rectified before the sale can proceed—assuming that you want to continue with the purchase. This is another area where you may want to renegotiate with the seller to pay for the work.
Environmental Inspection
It is sometimes recommended to get an environmental inspection to check for toxins in the home such as mold and asbestos. There can also be problems on the home site, like contamination from a location near a landfill, former oil field, dry cleaner, or gas station. Any problems uncovered in this area can mean serious health hazards and may be prohibitively expensive to fix.
Other Inspections
Areas subject to earthquakes may require a soil report and/or a geologic report to assess the risk of serious damage to the property in the event of such a disaster. Many areas require flood reports. If the home is too likely to flood, you won’t be able to get homeowner’s insurance, which means you can’t get a mortgage. In some cases, purchasing flood insurance in addition to your homeowner’s insurance will solve this problem. In rural areas, a land survey should be done to verify the boundaries of the property—in urban areas, the boundaries tend to already be very clear.
6. Purchase Hazard Insurance
This includes homeowner’s insurance and any extra coverage required in your geographic area such as flood insurance. You will be required to have homeowner’s insurance until your mortgage is paid off—and you’d probably want it, anyway. Choose your own insurance company, which may be different than the one the lender selects, and shop around to get the best rate.
7. Title Report and Insurance
These are also required by your lender, but again, you’d want them anyway. The title report makes sure the title to the property is clear—that is, that there are no liens on the property and no one else but the seller has a claim to any part of it. Title insurance protects you and the lender from any legal challenges that could arise later if something didn’t show up during the title search. If there is anything wrong with the title—known as a cloud or defect—the seller will need to fix it so the sale can proceed or let you walk away. Depending on where you live, the escrow company and the title company may be one and the same.
8. The Final Walk-Through
It’s a good idea to re-inspect the property just before closing to make sure no new damage has occurred and that the seller has left you items specified in the purchase agreement such as appliances or fixtures. At this point in the process, you probably won’t be able to back out unless the home has sustained serious damage. However, it’s not unheard of for a petty buyer to pressure his or her agent to get the agreement nullified over something insignificant.
9. Review the HUD-1 Form
At least one day before closing, you will receive a HUD-1 form or the final statement of loan terms and closing costs. Compare it to the good faith estimate you signed earlier. The two documents should be very similar. Look for unnecessary, unexpected or excessive fees as well as outright mistakes.
10. Close Escrow
If you make it this far, you’ll finally get to take possession of the home.
Who We Are
By definition, an escrow holder is a neutral third party, and we take this responsibility very seriously on behalf of each and every customer we serve. Our Mission is to provide you with an unparalleled experience of what a well-handled escrow can (and should) be. We are committed to working with leading edge industry technology. Great tools enable us to streamline processes and communicate more effectively, both of which are required for providing the great service you expect and deserve.
Our staff, experience, tools and commitment have enabled us to advance and excel in processing escrows of all types, including Commercial and Residential real estate sales and refinances, and have given us specific advantages in the specialized REO(foreclosure) and Short Sale markets.
We look forward to working with you. Let us show you how it’s done.
Here’s to your successful escrow!