Buying Basics - The Escrow Process

Escrow is defined by Webster's dictionary as "a deed, a bond, money or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition." Escrow provides confidentiality and impartiality during a real estate transaction.

Buyers, sellers and lenders have a personal stake in the outcome of any real estate transaction. Escrow is a neutral third party designed to assist these three parties in meeting all of the mutually agreed upon terms and conditions required to successfully complete a real estate transaction.

The escrow holder is used as a depository. Both the buyer and the seller provide funds, deeds, inspection reports, insurance information and any other related documentation to the neutral third party. The buyer, seller and lender give the escrow officer written instructions that must be met prior to completion of the transaction. Doing so enables the escrow officer to save time in the closing process.

Once a buyer and seller successfully negotiate an offer, escrow begins. Once the seller accepts an offer, the buyer will then deposit the earnest money into escrow. Earnest money is typically 1% to 3% of the purchase price of the real estate property.

Once escrow is opened, a title report is ordered to ensure the seller actually owns the property in question, and to determine if there are any liens against the property.

At this time, any applicable financing is processed. Once loan approval is obtained, the loan instructions and documents are prepared and sent to escrow by the lender. Inspections are completed and insurance information is typically gathered and processed at this time. New insurance policies are then set up for the new owner. This includes title insurance, homeowner's insurance, and any other applicable or desired coverage.

Once inspections are completed and insurance has been obtained, a loan agreement has been reached, and a title search has been completed, the next step begins. The escrow officer will review the file to determine that all contractual conditions have been met, the lender's instructions have been followed, and all title requirements have been satisfied. The closing documentation is then prepared.

Both buyer and seller sign all related documentation at this time. The buyer (traditionally, although this can also be the seller or a combination of both parties) will then submit all closing funds into escrow. The loan funds are deposited into the escrow account by the lender. Escrow then authorizes the release of recording.

Documents are recorded at the county recorders office. Funds are disbursed in accordance with the Disclosure/Settlement Statement, and the final documentation is forwarded to all interested parties.
 
Escrow is then closed.