What Is Escrow?
Escrow is a legal or financial agreement in which a third party holds money, property, or other assets for two parties that are in the process of completing a transaction. The third party is the escrow agent or company. The escrow agent only releases the funds or assets when all the terms of the contract are met.
Escrow is a way of ensuring that both parties in a transaction are protected from fraud, breach of contract, or non-performance. Escrow also reduces the risk of disputes and litigation by providing a neutral third party that can mediate and resolve any issues that may arise.
In real estate transaction, the buyer does not pay the seller directly for the property. The buyer deposits the funds to an escrow holder. The escrow holder, acting as a neutral third party, verifies that a title insurance policy can be issued pursuant to the terms of the contract. Then, the escrow holder arranges for the documents transferring title to the property to the buyer to be recorded, for the issuance of the title policy, pays any liens and all the costs associated with the sale that are chargeable to the buyer and seller, and disburses the sale proceeds to the seller. If the buyer gets a new loan, then the lender's money is deposited into the escrow and the lender's security documents are recorded at the same time as the deed.
Your escrow professional may:
Open escrow and deposit good faith funds into an escrow account
Conduct a title search to determine the ownership and title status of the real property
Review the preliminary report and begin the process of working with you and the title officer to eliminate the title exceptions the buyer and the buyer's new lender are not willing to take subject to. This includes ordering a payoff demand from your existing lender.
Coordinate with the buyer's lender on the preparation of the Closing Disclosure (CD)
Prorate fees, such as real property taxes, per the contract and prepare the settlement statement
Set separate appointments allowing the buyer and seller to sign documents and deposit funds
Review documents and ensure all conditions are fulfilled and certain legal requirements are met
Request funds from buyer and buyer's new lender
When all funds are deposited and conditions met, record documents with the County Recorder to transfer the real property to the buyer
After recording is confirmed, close escrow and disburse funds, including proceeds, loan payoffs, tax payments, and more
Prepare and send final documents to all parties.
The closing or signing appointment
The escrow holder will contact you or your agent to schedule a closing or signing appointment. You will have a chance to review the settlement statement and supporting documentation. This is your chance to ask questions and clarify terms. You should review the settlement statement carefully and report discrepancies to the escrow officer. This includes any payments that have been missed. You are responsible for all charges incurred, even if overlooked by the escrow holder. It's better to bring any issues to his or her attention before the closing has been completed.
The escrow holder is obligated by law to have the designated amount of money before releasing any funds. If you have questions or foresee a problem, let your escrow officer know immediately.
Don't forget your identification. You will need valid identification with your photo I.D. on it when you sign documents that need to be notarized (such as a deed). A driver's license is preferred. You will also be asked to provide your social security number for tax reporting purposes, along with a forwarding address.
What happens next?
If the buyer is obtaining new loan, the buyer signed loan documents will be returned to the lender for review. The escrow holder will ensure that all contract conditions have been met and will ask the lender to "fund the loan". If the buyer's loan documents are satisfactory, the lender will send the funds directly to the escrow holder. When the loan funds are received, the escrow holder will verify that all necessary funds are in. Escrow funds will be distributed to you and other appropriate payees. The keys to the property are then given to the buyer.
One escrow transaction could involve more than 20 individuals, including real estate agents, buyers, sellers, attorneys, escrow officer, escrow technician, title officer, loan officer, loan processor, loan underwriter, home inspector, termite inspector, insurance agent, home warranty representative, contractor, roofer, plumber, pool service, and so on. And often, one transaction depends on another. When you consider the number of people involved, you can imagine the opportunities for delays and mishaps. Your experienced escrow team can't prevent unforeseen problems from arising; however, they can help smooth out the process.