What is Escrow?
Once your offer on a home or other real property has been accepted by the seller, your transaction is then placed into “escrow.”
“Escrow” is a term that describes the neutral third-party handling of funds, documents, and tasks specific to the closing (or settlement, as it is also known), as outlined on the real estate purchase agreement or sales contract. The purpose of escrow is to facilitate the transaction by managing the disbursement of funds and documents.
Key Players in the Escrow Process
The escrow process requires a team effort. Your escrow officer will play a key role in the process, but homebuyers, sellers, lenders and real estate professionals are also integral throughout the process.
In many states, the escrow officer is known as the “closer.” In other states, licensed attorneys handle escrows, but often work with a closer from a title company to do some of the processing.
While a real estate agent may recommend an escrow company or officer, the buyer and seller have the right to choose their settlement service providers.
Escrow requirements vary, so your closing could require a home inspection, the purchase of homeowners insurance, the completion of negotiated repairs and the completion of financial requirements set forth by your lender.
To help encourage a more efficient transaction, it’s important to understand the key roles in the escrow process.
Buyer
- Reading and understanding the escrow instructions, agreements, terms and conditions
- Responding promptly to any correspondence regarding the transaction
- Carefully reviewing all closing documents
- Confirming the purchase price and costs of all services
- Preparing for any funds required to close the transaction
- Safely storing closing statements and other escrow documents for tax purposes
Seller
- Reading and understanding the escrow instructions, agreements, terms and conditions
- Responding promptly to any correspondence regarding the transaction
- Carefully reviewing all closing documents
- Confirming the selling price and closing costs
- Preparing for any funds required to close the transaction
- Safely storing closing statements and other escrow documents for tax purposes
Real Estate Professional
- Provides the escrow officer with information necessary to create the escrow instructions
- Facilitates communication between all parties to the transaction
- Tracks milestones within the transaction to expedite the process
- Helps resolve possible issues between buyer and seller
Escrow Officer
- Adheres to escrow instructions (outlined in the sales contract)
- Processes the escrow
- Closes the escrow
- Pays bills, fees and charges as outlined in the escrow instructions
- Disburses funds
- Provides settlement documentation
Lender
- Provides specific instructions to the escrow officer
- Processes and funds the loan
- Provides Closing Disclosure
Process
Once all transaction contingencies are met, including the execution of all documents necessary to complete the transaction, the escrow company will disburse funds to the seller and other parties, all in accordance with the purchase agreement.
Cost
The cost of escrow services is covered by the buyer or seller as determined by local custom, market conditions or contractual agreements made within the purchase offer.
“Closing”
Once all the tasks described within the sales purchase agreement have been completed and the appropriate funds are disbursed, the transaction is complete and the escrow closes.
Recording Documents
While signing your loan documents is a big step, a real estate transaction doesn’t become “official” until the appropriate documents are recorded in public records. This step, referred to as “recording,” happens when the escrow or title company sends the deed, as well as the deed of trust (the attached mortgage) to the county recorder’s office.
Round Table Closings
The real estate closing process varies around the country, but every transaction requires coordination between skilled professionals. In some areas of the country, real estate settlement is completed at what is known as a “table closing.”
A table closing involves a number of people. Typically, the buyer and seller attend the closing along with their real estate agents. A real estate attorney, settlement agent or title agent may conduct the closing. The people involved in a table closing may vary from state to state, so be sure to ask your real estate agent if you have specific questions.
During the table closing, the seller signs paperwork that ultimately transfers the title of the home. The buyer will also sign the necessary mortgage documents, including the promissory note. When everything is signed and the required funds have been collected, the sellers will deliver house keys, garage door openers, security codes and any other items necessary to access the property, and then receive the proceeds to the transaction.
If you’re the buyer, you’ll walk away from the closing table as a new homeowner. Congratulations!
Transaction Forms and Disclosures
Prior to your table closing, you’ll receive various forms and disclosures from your lender, attorney or other parties to the transaction. These documents include the Loan Estimate and the Closing Disclosure, two forms the Consumer Financial Protection Bureau requires your lender to provide. After your transaction closes, you’ll also receive a Settlement Statement.
What is Title Insurance?
Real estate is the nation’s largest market, making the purchase and sale of real property essential to the health of the U.S. economy. These transactions are never without risk, however. That’s why title insurance has been protecting American homeowners for more than 125 years.
The Two Title Insurance Policies
As a buyer of real estate property, you’ll want to protect your investment — and the ownership rights that come with it. That’s why it’s wise to purchase an owner’s policy of title insurance in conjunction with the loan policy your mortgage lender will require you to purchase. The loan policy insures the lender against covered title defects up to the amount of the insurance, while an owner’s policy protects your interest in the property.
Learn more about both title insurance policies and which helps to protect your interests.
Lender’s Policy
If you’ve ever mortgaged a home, chances are you were required to purchase a title insurance policy. This lender’s policy (often called a loan policy) is required by most lending institutions as a way to insure their security interest in the property. This policy protects the bank or other lending institution for as long as they maintain an interest in the property (typically until your mortgage is paid off).
Owner’s Policy
However, as a buyer, you also want to protect your investment — and the ownership rights that come with it. This is why it’s wise to purchase an owner’s policy of title insurance, which will protect your rights as the homeowner for as long as you or your heirs have an interest in the property.
Both title insurance policies not only pay valid claims and legal fees to defend against hidden title issues, but also help to decrease ownership risks by providing a thorough title search prior to the issuance of either policy.
Customs
There are various customs regarding the purchase of title insurance. In some areas of the country, it is customary for the seller to purchase the owner’s policy for the buyer, whereas in other areas the buyer purchases this important protection.
Refinance Transactions
If you’re considering refinancing your mortgage, you may be surprised to see that you are required to purchase a new lender’s policy of title insurance. This is because a lender’s policy only provides coverage for the life of a loan. When a home is refinanced, the life of one loan ends and another begins. Thus, a new lender’s policy for title is required. Because an owner’s policy provides coverage for as long as you or your heirs hold an interest in the property, there is no need to purchase a new owner’s policy when refinancing.
The Title Search Process
When you receive the keys to your new home, you may already have an idea about the work that goes into a successful closing. However, few new homeowners recognize the efforts involved in searching and underwriting a title insurance policy – one part of your closing that can prove invaluable down the road.
Public Records Search
An in-depth title search is generally comprised of a thorough examination of public records. This can be difficult because, depending on the jurisdiction, liens and judgments on a property may be filed a number of ways – by the name of the buyer, the name of owner, the street address, lot number, etc. Many title companies today have created exhaustive and systematic methods for conducting these searches, resulting in large databases of consistently indexed data that facilitate faster and easier title searches. These “title plants,” or large stores of uniformly organized public data, help to complete title searches faster and help ensure accuracy.
Search Findings
Title searchers uncover more than simply liens and judgments, however. A thorough title search will include information about mortgages, street and sewer assessments, taxes and levies and countless other issues that could taint an otherwise sound transaction.
For instance, a title searcher may examine a property and find no judgments or liens, but uncover special building restrictions of which the buyer was unaware. Or the title search may disclose previously established easements, such as civil sewer or power. A title searcher may find that some part of the property encroaches on neighboring land, warning against possible ownership issues in the future.
New Construction
Even for a newly constructed property, a title search can be quite time-consuming. While the actual structure in question may be new, the land on which it resides has likely transferred hands countless times prior to the new construction, making ownership issues a possibility down the road. Additionally, and in particular with respect to a newly-built home, there is no guarantee that subcontractors and/or suppliers have not placed liens on the property for unpaid debts.
Behind the Scenes
The legwork behind the issuance of a title insurance policy is rarely seen by the buyers or sellers of a property. Title professionals work to remove any existing “clouds” (judgments, easements, liens, etc.) prior to issuing a policy in order to decrease their financial risk to insure the title. When a cloud is difficult to clear or significant enough to question the wisdom of following through with the transaction, the title company will make this known to the prospective buyer.
Peace of Mind
The data collected through a title search not only gives the buyer peace of mind regarding the property they’re purchasing, but also helps reduce the risk of title problems arising in the future. This makes a title insurance policy a valuable investment towards protecting an even greater investment – your home.