Opening escrow is the final stage of buying a home. Up to this point, you have gotten pre-approved for you loan, scoped out neighborhoods, created a wishlist, chosen your Realtor, compared different homes, and put in an offer. The sellers either accepted your offer, or issued a counter offer, which you accepted. So at this stage, your offer has been accepted – congratulations! But the work isn’t done yet. Here’s what to expect during escrow, and what it takes for the house to officially become yours.
What is Escrow?
Many people have heard the term “escrow” before, especially during the home-buying process. But what is it exactly? Escrow, sometimes called “closing”, is when an impartial third party holds onto money and deeds to keep them safe until the deal is closed and the house officially changes ownership. In California, it is typically an “escrow company,” but in other parts of the country, it may be a title company or even an attorney.
How does escrow work?
Once your offer has been accepted, you will place your earnest money or good faith deposit into escrow. It will get applied toward your down payment at the close of escrow. The escrow company will generate escrow instructions, which both parties will sign, along with a grant deed, which the seller will sign and the escrow company will keep on file until the close of escrow. The escrow company’s role is to ensure that all conditions and agreements by both the seller and the buyer have been met, and that this process goes smoothly. Only after escrow is closed, does the money for the house go to the seller, and the house title reflecting change of ownership get recorded with the county.
Financing and Appraisals
One of the first steps after opening escrow is to get the house appraised. The buyer pays for the appraisal, and the buyer’s lender hires the appraiser. The appraiser will view and measure the property and compare it to comparable active, pending, and closed properties in the area, which protects the buyer from overpaying for the house. While the appraisal process is occurring, the lender may be requesting additional documents, such as updated paycheck stubs and bank statements. They will be able to finalize your loan and lock in your interest rate.
While you aren’t required to conduct a home inspection when you purchase a home, it is in your best interest to do so. The standard California purchase agreement provides buyers with an inspection contingency along with appraisal and loan contingencies. You should expect a home inspection to take two to three hours. A home inspector should be evaluating all the home’s major systems and telling you if there are any problems or issues that need to be attended to. Some of these problems may require extra negotiations between you and the seller, resulting either in a possible credit or repairs. Remember that the contract says the home is being sold “as is” but that’s subject to your inspection and you are allowed to make “reasonable” requests. (See What to Expect During a Home Inspection).
Pest and environmental inspections may be indicated as well. You want to ensure that there are not any unexpected guests in your home such as termites or roaches. If there are any problems, it is best to find out about them before the home becomes yours, so you can negotiate accordingly – or back out if you need to.
Before closing escrow, you will receive a preliminary title report, and all title issues on the property must be cleared. A title search will need to be conducted to find out if there are any claims on the property that need to be resolved. All liens, from contractors, taxes, etc. need to be cleared so that no one besides the seller has any claim on the property. If these are not cleared up before the house becomes yours, it can cause serious issues down the way.
The buyer must show proof of homeowner’s insurance before escrow can close. You may also need to purchase flood insurance if the home is in an at-risk area. The estimate you’ll receive from your lender will include insurance costs, but it’s up to you to compare insurance companies and select your provider. You’ll then provide that information to the escrow company. In addition to a homeowners policy, buyers with significant assets may also want to include umbrella insurance for additional liability coverage beyond the typical homeowner’s policy.
As you get close to the final date, most buyers do a “final walk through” of the home. This is your opportunity to make sure that the home is in the agreed-upon condition. At this point, all of the necessary steps have typically been completed and escrow is ready to close. Closing involves a lot of paperwork, but the escrow agent is there to ensure that all documents are filed correctly. They will also prepare a new deed naming you as the new owner of the house and submit it to the county recorder’s office. You will submit your down payment at this time as well and pay any additional closing and escrow fees. Again, the escrow agent will make sure all funds are dispersed to the appropriate parties. After escrow is closed, the house is officially yours! Congratulations!
Escrow is one of the most confusing parts of the home buying process. Yet having a knowledgeable Realtor by your side to help you through it all will make the process run smoothly.
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