The details around the process of a home purchase can seem daunting. Especially for first time buyers, the legal requirements and seemingly arcane group of vendors to work with is particularly confusing. However, with a little bit of knowledge and an experienced real estate agent, navigating this process can be much less stressful than you might think.
What is escrow?
Technically escrow is a bond, deed, or other document kept in the custody of an impartial third party, taking effect only when a specified condition has been fulfilled. In practice, the escrow process begins after a home purchase offer has been accepted by the seller.
A neutral third party is responsible for holding the deed to the property, collecting funds required for the sale, and ensuring fulfillment of all sales conditions. This could include any inspection or loan contingencies that are part of a purchase agreement. The buyer’s real estate agent will open an account with an escrow and title company and will be contacted directly by the escrow officer with instructions on how to wire the earnest money deposit to that account.
What is the difference between title and escrow?
A title company is responsible for holding monies due to the seller until the title is verified of being free and clear of any claims. Title insurance is issued to protect buyers and sellers from possible claims and disputes by the other party or a third party. Most institutional lenders will require that you purchase title insurance to complete a home purchase.
In property law, a title is a bundle of rights to a property that can be transferred. The rights in the bundle may be held by different entities, which is generally the case when a buyer makes a down payment and owns a portion of the property, while a bank provides a loan for the balance of the sale price and owns another portion of the property (while the mortgage holder pays down the loan).
So the deed to the property, and the title to the property are not technically the same thing. In many places the title and escrow documentation processes are handled by separate companies but in Northern California, both are handled by the same company.
Once a buyer signs a ratified home purchase agreement, the buyer’s real estate agent works directly with the mortgage lender and escrow company to finalize the paperwork related to the transaction. The agent’s responsibility is to make sure the appraisal is received by the lender and coordinate with the lender to ensure timely delivered of closing document to the escrow company. The escrow officer will reach out directly to set up an in office loan document signing. Buyers should plan to spend up to 90 minutes and make sure to bring a California state ID.
Note that most loan documents need to be notarized which is usually done at the title company office. There are mobile notaries who can meet at the buyer’s home or office for convenience, but these services cost extra so it’s important to be aware of additional fees.
To ensure a smooth, and timely escrow process, there are things buyer’s should definitely NOT DO during escrow:
- Travel internationally without providing advanced notice to the agent, lender, and escrow officer. Some loan closing documents require a physical (wet) signature and the buyer may need to either obtain a power of attorney (to allow a third party to legally sign your documents), or make an appointment at a U.S. consulate in the country they are traveling to which may take time to arrange.
- Make any large purchases that could negatively impact credit scores. Until escrow closes, any changes to credit scores could put pending loans at risk. Don’t risk it.
- Accept any form of gift funds, no matter how small the amount. Mortgage underwriters want to ensure funds in the buyer’s account that will go to a downpayment is not considered a loan from friends or family. Buyers should check with the lender before accepting any funds into bank accounts to understand requirements for gift letters or other documentation.
- Schedule movers early in the hopes of escrow closing sooner than scheduled. The escrow officer and lender have mandatory waiting periods and are also working with the local County Assessor office to record you as the new owner’s of record and delays can occur. Until title has transferred to the buyer, the buyer does not own the property and even accessing the property creates a possible liability for the seller, so be patient, and wait for the closing process to run its course.
The good news is that there are things a buyer can proactively do to increase the odds of a successful closing:
- Respond to all requests for documents or information in a timely manner.
- Submit the earnest money deposit within three business days of ratifying your purchase agreement.
- Tell the escrow company if any borrowers have plans to travel at any point during the escrow period so they can plan to sign with a mobile notary or create a durable power of attorney or make an appointment at an embassy if traveling abroad.
- Carefully review the buyer settlement statement and report any errors found to the escrow company.
The typical escrow window is 21 days in the Bay Area, but may be shorter or longer based on negotiations between buyer and seller. The buyer’s agent will help coordinate the home purchase closing process, but the primary point-of-contact during this time will be with the lender and the escrow officer.
It’s advisable to ask questions of your agent regarding anything you don’t understand. Make sure to be informed and get thorough explanations on the details. Experienced agents will be able to provide all the details needed to ensure a timely closing process.
Responding to requests in a timely manner is crucial to a successful escrow. By communicating clearly and providing all required documentation, every buyer will be steps closer to the dream of home ownership!