The escrow process in a real estate transaction often feels mystifying and opaque for first time home buyers. Having a better understanding of the reason for an escrow period and what occurs during this stage will enable you to better communicate with all parties to the transaction, aid them in meeting key timelines, and dramatically improving the likelihood of a drama free closing.
To start with, let’s talk about what escrow means:
“Noun: a bond, deed, or other document kept in the custody of a third party, taking effect only when a specified condition has been fulfilled.”
Escrow is the process where parties to the transfer or financing of real estate (buyers, sellers, lenders, title companies, etc.) deposit documents, funds, or other things of value with a neutral and disinterested third party (the escrow agent), which are held in trust until a specific condition occurs according to specific, mutual written instructions from the parties.
The buyer in the transaction will typically select an escrow vendor, and a good real estate agent can recommend an experienced escrow service provider. Once you’ve selected a provider, escrow is opened when a fully executed purchase agreement has been delivered to the escrow holder. The escrow officer will then order a real property title search to ensure there are no third party claims against the property. Escrow instructions describe what should be done and in which order and give the escrow officer authority to act. Each party to the transaction must sign the instruction document for them to be valid. At the close of escrow, the escrow officer releases funds and documents in accordance with the escrow instructions, pays bills as authorized, and prepares and delivers a final closing statement to the parties.
Escrow costs vary by vendor and are usually split between buyer and seller, but can be negotiated however the parties agree. Escrow only represents a portion of your closing costs, so make sure you’ve spoken with your lender to understand any possible out-of-pocket expenses you may be liable for during the closing process.
During the escrow phase, the buyers and sellers primarily work directly with the title company and mortgage lender to provide any necessary documentation. Depending on how the buyer’s agent wrote the offer there may be contingencies to the contract such as an inspection, appraisal, or mortgage approval. Your agent (along with their transaction coordinator) will stay on top of these deadlines and make sure that you are clear to remove them. While you may be speaking with the title company and your lender more frequently than your real estate agent during this period, it is critical that you continue to communicate any information to your agent that could affect the transaction.
There are a number of items that can adversely affect the closing process and the subsequent recording of title transfer:
- International travel during escrow
There will be a number of documents you need to sign during the escrow process, so you will need to be available to meet at the title company office to complete the transaction. If you must be out of the area, you may be able to assign power of attorney to another party to sign on your behalf, but you want to be planning for this well ahead of time. In general, it is best to schedule travel outside of the closing window. Escrow typically takes about 30 days, but it can vary dramatically depending on contingencies and other factors, so make to check with your agent to understand the timing of each step in the process.
- Marital dissolution
A marital dissolution can have a material impact on your financial situation which can put your transaction at risk. If you find that your marriage is tenuous, it may not be the best time to engage in a real estate transaction until you have a clear, written understanding with your spouse of how the finances of the transaction will be handled.
- Making a large purchase
Any big purchase can impact your debt to income ratio which can possibly jeopardize financing of your real estate purchase. Unless you have an excess of liquid assets, it is best to wait until your transaction concludes before making any significant purchases.
- Forwarding inspection reports directly to the mortgage lender
You should always use your real estate agent to communicate any transaction details with your lender. Items such as pest or mold remediation or other safety hazards contained within the disclosure reports can become conditions of funding, requiring the buyer to remediate prior to loan closing. Make sure to have your agent manage communications with other parties to the transaction in lieu of taking things into your own hands.
- Switching to a new lender
Changing lenders at the last minute can jeopardize the escrow process and should be avoided whenever possible. The primary reason buyers consider changing mortgage brokers late in a transaction is to get better interest terms or lower transaction costs. By working with a local, reputable lender early in the process (and getting recommendations from your real estate agent), you are less likely to encounter frustration when you get near closing.
- Changing financing options
Imagine you received financing approval for a 30-year fixed mortgage, but at the twelfth hour decided to switch to an adjustable-rate-mortgage to get a better short-term interest rate. Changing your loan terms at the last minute can have a material impact on the closing process, so make sure to discuss any financing concerns you may have with your agent and your lender well ahead of closing to avoid any delays during the escrow phase of the transaction.
In short, it is important to understand the details of the escrow process so you can plan accordingly, and avoid changing anything in your personal or financial situation at the last minute that could jeopardize the transaction. You should also make sure to keep your agent in the loop so they can help you navigate an unexpected request from the escrow agent or any other party to the transaction.
While escrow laws are indeed complicated, by working closely with your agent to identify a qualified escrow officer, understanding the basics of the escrow process, and avoiding any last minute changes that could threaten the deal, you’ll find the escrow process easy to navigate and you’ll enjoy a smooth closing cycle and a rewarding real estate transaction.
For a more in depth review of this topic I suggest you take a look at information on escrow in my Useful Links page. If you’re looking for information on local escrow vendors, please don’t hesitate to contact me.