Buying or Selling a Home? Understand the Escrow Process

Over the last few months, I have talked with quite a few people that are thinking about buying or selling a home in the coming months. They want an idea of what they should do to prepare for it. Beyond my financial “dollar and cents” guidance, I like to layout the home buying/home selling process so they are prepared for the different steps that need to be cleared.

If you have never gone through the process or it has been a long time since your last home purchase or sale, you may start down the path with great excitement, negotiate a purchase agreement and then find things slow way down once you come to the escrow process.

All you want to do is move in  — or get your money and move out — but you’re left wondering, “What is this escrow thing and why does it take so long?” From personal experience, it can feel like you are left waiting in the dark, receiving information on a need to know basis.

Here is some information that may help to demystify it:

The Purpose of Escrow

Escrow may be the last hurdle in buying or selling real estate, but it’s a hurdle that can take a while. The escrow agency simply acts as an impartial third party. They ensure that everything that must be done has been done before the property and the funds are exchanged. In the simplest explanation, the escrow agency handles the money and the required documentation.

The Escrow Process

Let’s discuss what escrow really is and what needs to happen for everything to go smoothly before the deal is finally closed.

1. Appraisal. If you are using a mortgage, your lender will have the home appraised, as it is part of their process to approve your home loan. It also serves as a second opinion regarding the fairness of the selling price. They’re making sure that the amount of the loan isn’t greater than the value of the home. The lender is always concerned about adequate collateral to back the amount you are borrowing.

2. Financing. Even with mortgage terms pre-approved, it’s standard for the lender to have additional requirements that must be met before they’ll provide the funds. Usually, the underwriter working for the lender makes these requests and often included income verification and credit checks that need to be updated before the final distribution of funds. The escrow agency helps to ensure that these additional requirements are met before the closing takes place.

3. Various Inspections. A home inspection, pest inspection, hazard inspection, radon, mold, and others are standard by buyers and many are normally required before a lender will finalize loan approval. The lender doesn’t want to make a loan until it’s fully aware of an independent view of the property’s market value.  A standard home inspection will look at the electrical system, plumbing, structure, roof, and general condition of the property. It will also assess any necessary repairs. Pest inspections look for termite damage and any other type of infestation that would reduce the value of the property or require extermination. The lender’s main concern with these inspections is that the property is in good condition so that they are able to get their money back out of the property should the buyer fail to make the mortgage payments.

4. Home Insurance. Your lender will require home insurance is secured. Again, they want to ensure that they will be paid if the house is damaged or destroyed.

5. Title Search. Do the sellers actually own the house? Are the property taxes paid up? Are there any liens against the property? A title search will make sure there are no problems with the title.  Basically, the title search ensures that there are no creditors with claims against the home and that the seller actually has the right to sell the house. It also looks for any other people that might have an ownership claim on the property.  For example, is a husband selling the house without the wife’s agreement? Are there any uncles, cousins, business partners, that have a claim to the property?  Title insurance is also part of the closing process. This means the insurance issuer will deal with any title problems that may have been missed during the title search.

6. Preparation for Closing.  All documents needed for the closing are verified and generated and the closing is scheduled.

While this list is not inclusive and is an example when a lender is involved, it covers the basics of the escrow process. Be aware that it can vary from state to state so ask your real estate agent or attorney for the specifics on what to expect in your situation. Have them walk you through it to better understand where things can go off course. I often say, ‘We don’t know what we don’t know.” So don’t be afraid to ask questions and find out what can you can do on your end to help expedite the process.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net