What is an escrow?
An escrow is a transaction in which an impartial third party acts upon the instructions for both a buyer and seller (or borrower and lender) in carrying out instructions, delivering papers and documents, and disbursing funds. Escrow's are used to enable the parties to deal with each other with less risk since the escrow holder acts as a custodian of funds and documents, a clearing house for payment of demand and performs the clerical duties for settlement of the escrow.
How does the escrow process work?
The escrow officer takes instructions on the terms of your Purchase Agreement and the lender's requirements. The escrow officer can hold inspection reports and bills for work performed as required by the purchase agreement. Other elements of the escrow include hazard and title insurance, and the grant deed for the seller to you. The escrow can't be completed until these items have been satisfied and all parties have signed the escrow documents.
How do I open an escrow?
Either your real estate agent or the buyer's agent may open the escrow. As soon as you execute the Purchase agreement.
What information do I need to provide?
You may be asked to complete a Statement of Identity as a part of the paperwork. Because many people have the same name, the statement of identity is used to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is considered confidential.
How long is the escrow?
The amount of time necessary to complete the escrow is determined by the terms of the purchase agreement. It is normally 45 to 60 days, but can range from a few days to several months.
The escrow holder
The escrow holder could be any disinterested, third party, although some states require that certain escrow holders be licensed. Due to the technical nature of the transaction and because the escrow holder will be handling your money, it is advisable to select an established, independent escrow firm, and attorney or an escrow officer with a title insurance company. Generally, the escrow officer is trained in real estate procedures, title insurance, taxes, deeds and insurance.
Due to the necessity to remain impartial throughout the entire process, the escrow officer, while courteous, will limit comments to the business at hand. This formal behavior is meant for the benefit of all concerned, since the escrow officer must follow the instructions of both parties without bias.
The escrow holder's duties
The escrow holder is a neutral third party, taking instructions based on the terms of the purchase agreement and the lender’s requirements.
Duties of the escrow holder include:
◊ Receiving and holding all monies, instructions and documents pertaining to the purchase.
◊ Serving as the communication link and liaison between all parties.
◊ Requesting a preliminary title search and report to determine the status of title to the property.
◊ Requesting a beneficiary statement or payoff demand from existing lenders.
◊ Holding inspection reports, deeds, and insurance documents.
◊ Complying with the lender's requirements in its instructions to escrow.
◊ Preparing or obtaining the grant deed.
◊ Prorating taxes, interest, insurance, rents and other costs related to the property.
◊ Recording the deed and other documents.
◊ Requesting the title insurance policy.
◊ Closing the escrow according to the instructions of the buyer, seller and lender.
◊ Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs,
title insurance, taxes, recording fees and other costs.
◊ Preparing final statements of disposition.
Escrow instructions
Escrow instructions are written documents, signed by both parties, which direct the escrow officer in the specific steps to be completed in order that the escrow can be closed.
◊ The method by which the buyer will pay for the property.
◊ The time limit set by the seller and buyer to complete the purchase.
◊ The instruction and authorization to the escrow officer to disburse funds for recording fees, title insurance policy,
real estate commissions, and other costs incurred through escrow.
◊ Instructions as to the proration of insurance and taxes.
◊ The instruction to the escrow holder to receive the balance of the purchase money prior to close of escrow.
The escrow process
The escrow officer thus acts for both parties and protect the interests of each within the authority of the escrow instructions. The escrow process enables the purchaser’s money to obtain deliver of title. Upon delivery of the deed, the money becomes the property of the seller, who has previously authorized the escrow holder to pay the necessary amounts to clear the title. The process will be completed when all of the following occur:
◊ The deed to the purchaser is recorded.
◊ The deed of trust or mortgage, to the lender is recorded.
◊ The lender's funds become the property of the borrower and in turn become the property of the seller.
The escrow holder would at this point divide the charges according to the instructions, and prepare final statements to account for all monies deposited.
Division of charges
The method of dividing the charges for the services performed through escrow or as a result of escrow varies from county to county. The fees and service charges to be divided might include; title insurance policy premium, escrow fee, any transfer taxes, recording fees and all costs in connection with any loan being obtained. Local custom will dictate to the escrow holder how these charges are to be divided, unless the buyer and seller make a special agreement as to who will pay what.
Your appointment
Your real estate agent will coordinate with you and the escrow officer to arrange a mutually convenient time for signing the escrow papers. It is always best to arrange for the earliest possible time. Sellers should allow at least 30 minutes to 1 hour to sign. Proper identification will be required for notarizations of grant deeds and deeds of trust. A valid California driver's licenses with picture or State of California Department of Motor Vehicles Identification Card or U.S. Passport are best for this. Call the escrow officer early to discuss alternatives if you don't have one of these forms of identification. At the signing, sellers will also be asked how proceeds are to be disbursed. On rare occasions, funds are insufficient to close escrow and you, as the seller, must deposit money into the escrow. Should this situation occur, you will need to obtain a cashier's check or certified check issued by a California financial institution made payable to the title company in the amount indicated to you by our escrow officer. A personal check may delay the closing since the title company is required by law to have "good fund" (check clearance) before disbursing funds from escrow. Similarly, an out of state check could cause a delay in closing, due to delays in clearing the check.
Closing the escrow
Closing the escrow is a legal transfer of title to the property from the seller to the buyer and is the culmination of the transaction. Once all the conditions of the escrow have been satisfied, the escrow officer advises you of the date the escrow will close and takes care of the technical and financial details. Usually the Grant Deed and Deed of Trust are recorded within one working day of the escrow's receipt of loan funds. This completes the transaction and signifies the "close of escrow." Once all of the terms and conditions of escrow for both buyer and seller have been fulfilled, and all closing conditions satisfied, the escrow officer will return the instructions and documents to the lender for final review. Following the review, which usually occurs within a day or two, the lender is ready to fund the loan and advises the escrow officer, so that the necessary work can be completed to record the documents and "close" the escrow.
After the close of escrow
After the loan has been finalized, the documents signed and recorded, and the financial settlement completed, there are still several steps that must be accomplished to complete the transaction. If your existing loan is being paid in full from the escrow, your lender is required by law to issue a full reconveyance (release) of their loan. As soon as the deed of reconveyance removing the previous Deed of Trust is received, it should be recorded and the original returned to you. This may take several weeks.
In summary
The escrow process was developed to help you facilitate the sale or purchase of your home. The escrow holder accomplishes this by:
◊ Acting as impartial "stake holder."
◊ Processing and coordinating the flow of documents and funds.
◊ Responding to the lender's demands.
◊ Securing a title insurance policy.
◊ Obtaining approval from parties to the transaction as needed.
◊ Precisely prorating and adjusting any fire insurance, taxes, rents and other such items.
◊ Recording the deed and any loan documents.