There’s nothing better than being prepared ahead of time for a new experience. While it’s fun to be spontaneous and make spur of the moment decisions, certain situations require a bit of research and information in order to be informed so you can make educated decisions. Buying and selling a house is one of those life moments where it’s important to be informed and receive guidance from a professional, experienced real estate agent. The process of buying or selling a home can be very easy, or it can be very complicated depending on the unique situation of both parties involved. One of the main stages of purchasing a home is the escrow process, which begins as soon as an offer is accepted and ends when the keys are transferred and title is signed over to the new owners. There are numerous steps involved throughout the escrow process, some are optional while others are mandatory, but in this blog post we’re going to comb over the escrow process in detail and explain every aspect of it as it relates to buyers and sellers.
The escrow process is facilitated by an escrow agent – this is a neutral party that holds onto the buyer’s funds and ensures that the terms and conditions of the purchase contract are met by both the buyer and seller. Once escrow verifies that all parties have completed their obligations as stated in the signed purchase agreement, then the buyer’s funds will transfer to the seller and ownership will be transferred to the buyer.
Escrow companies are licensed and regulated by the state, which provides oversight into how the company is managed and that they fulfill their duty as a third party to any real estate transaction. Because large sums of money flow through escrow companies on a daily basis, there are strong security measures in place to protect buyers and sellers and to keep the funds safe from hackers and scammers. The reliability and performance of an escrow company are absolutely vital to protecting the interests of all parties are involved in a real estate transaction.
The Escrow Process Explained
Step 1 – Open Escrow
The first step in the process is to select a property that you like, submit an offer, go back and forth on negotiations and have a signed purchase agreement on the home between both the buyer and the seller. Once both parties have signed the contract and the real estate agent delivers it to an escrow agent the escrow process can begin. The buyer must submit a deposit, also known as earnest money, to the escrow company who holds on to the money until the close of escrow. The seller will then produce a list of property disclosures with their agent, which will be reviewed by the buyer who can either accept or reject them. Seller disclosures will often include information about the property including any flaws or issues with the home, information about previous improvements and repairs, as well as any potential environmental hazards. Sellers are given a disclosure packet to fill out before they even list a property for sale so they can be prepared – defects and issues with the home must be disclosed to a buyer before their offer is accepted.
After the buyer reviews all disclosures they can choose to complete a home inspection by a professional and experienced home inspector, which will be shown in the contract as the inspection contingency. The buyer will have a specific amount of time allotted to complete the inspection, which will include a thorough inspection of the roof, sewer system, chimney, pool, pest inspection and general overview of the entire home. Buyers also have the option to obtain additional inspections by professionals for a pool or other special area of the home. Once the inspection is complete, the buyer can renegotiate certain terms of the purchase agreement, including asking for a reduction in price to cover any necessary repairs that came up during the inspection. The seller has the opportunity to respond to these requests by either agreeing to them, submitting a counteroffer with a different solution or to decline the changes. If the buyer and seller cannot come to an agreement on this renegotiation then the transaction will fall out of escrow and the earnest money deposit will be returned to the buyer.
Step 2: The Mortgage Escrow Process
If the buyer is borrowing funds for the purchase of the property, the escrow process takes longer and can sometimes become complicated. The buyer will submit a loan application directly to their lender or through a licensed mortgage originator. Most buyers will have a pre-approval letter from their lender showing how much they are qualified to borrow and at what price they can afford to buy a home. In order to obtain a pre-approval buyer must prepare a comprehensive list of personal financial documents, including:
- Several monthly bank statements
- Federal tax returns for the last two years
- Verification of employment
- Explanations about any credit inquiries
- Information about divorce settlements, owed child support, bankruptcies, liens and anything that could potentially affect their ability to pay their mortgage
Once all this information is submitted then the lender can either approve or reject the application for a home mortgage loan. If the buyer is approved then they will receive a loan commitment letter, which shows that the lender will fund the mortgage and requires a property appraisal to confirm the current market value. If the home appraises for less than the purchase price, the buyer will have to put down a bigger down payment and renegotiate their loan terms. The purchase agreement will outline specific dates by which the buyer must meet their loan contingency and appraisal contingency. The final portion in this mortgage escrow process is for the buyer to secure homeowner’s insurance that needs to be submitted to the lender.
This step of the escrow process is lengthy and there are many details and steps to follow. Our team can easily navigate this process, walk you through all the terms and conditions and ensure that you meet every deadline in a timely and stress-free manner. The most important thing to keep in mind during the escrow process is to avoid major financial commitments or life changes, including switching jobs, opening new credit card accounts or buying big ticket items like a new TV or a car – this could put your loan approval in jeopardy and can derail the entire purchase transaction.
Step 3: Closing Escrow
The buyer has the right to complete a final walk through of the house before escrow is scheduled to close. This allows the buyer to make sure that any agreed upon repairs were completed and that the home is in the same condition as it was at the beginning of escrow. Once the walk through is done the buyer will have to sign all of their loan documents and complete any necessary paperwork that is remaining prior to the loan funding. A title search will also be done to determine that the seller is the owner of the home and that there are no liens that are tied to the home – if the title search is clean then the closing process will continue. At this point in the process there is a lot of paperwork involved for both the buyer and the seller – once all of the paperwork is completed and signed the buyer will pay any remaining closing costs and the title deed will be recorded with the appropriate government agency and transfer title, or ownership, to the buyer. At this point in the process escrow will pay out all parties involved in the transaction including the seller, real estate broke and/or attorney and anyone else who participated in the sale. The keys to the home will be delivered to the buyer who can then proudly take possession of their new home!
If the seller needs to stay in the property beyond the close of escrow, then there must be a signed agreement with the buyer granting them permission to stay at the home with details showing how long they can stay, how much per diem rent will be paid, etc.
The escrow process is undoubtedly the most daunting part of a real estate transaction, for both a buyer and a seller. There are many moving parts, many things that need to be done in a timely manner and often at the same time, and there are many things that can go wrong. This is why it’s important to take the time to interview real estate agents and work with someone who is professional, experienced and who you feel comfortable with. For more information about the escrow process, or if you are interested in buying or selling real estate in Bryan College Station, please contact us. We would love to show you around, explore current listings, guide you through your real estate transaction from start to finish and assist you in making your real estate dreams come true – whether you are buying or selling a home.