Although defining escrow can be difficult, basically the process of escrow is this: Buyers and sellers deposit documents and money with a neutral third party to be held. When certain conditions agreed upon by both buyer and seller are met, the third party (the "escrow holder") then distributes the documents and the money.
The escrow holder works for both the buyer and the seller, and can act only according to specific written instructions given by both parties. The steps followed by an escrow officer in a conventional transaction might be as follows:
- Receive buyer's initial deposit and prepare escrow instructions. Obtain all signatures.
- Order title search and receive preliminary title report.
- Distribute copies of preliminary title report to all parties and obtain approval.
- Request "demands" (that is, pay-off statements) from existing lenders.
- Obtain seller's signature on grant deed. Hold grant deed until all terms are meet, and all money is deposited.
- Calculate prorations on property taxes, rents, insurance, or other expenses as required.
- Coordinate with buyer's lender. Order and process buyer's loan documents.
- Receive buyer's down payment funds and request funds from buyer's lender.
- Order recording of grant deed to buyer and distribute all funds: Pay-off existing loans; pay required costs, such as termite completion; release net proceeds to seller.
Most purchase contracts will require that the buyer apply for financing within a few days after acceptance of the buyer's offer. Knowledgeable real estate agents will arrange for buyers to be "pre-qualified" by a lender before finalizing any purchase contract.
So, at the same time the escrow officer is engaged with instructions, title searches, and demands; the buyer and the buyer's lender are busy with the loan approval process.
The steps followed by the loan officer processing the application might be as follows:
- Obtain and review the buyer's credit report. Obtain satisfactory explanations from the buyer of any negative items.
- Verify other credit reference items, such as rent payments to a landlord.
- Verify the buyer's sources of income.
- Verify that the buyer has adequate liquid funds for his or her down payment, closing costs, and reserves.
- Obtain all supporting documentation from the buyer.
- Order an appraisal of the property, and confirm that the property's value is equal to the purchase contract sales price.
- Obtain buyer's signatures on federally required Truth-In-Lending documents.
- Submit the loan to underwriters for final approval.
- Coordinate delivery of the buyer's loan documents to the escrow officer.
While the escrow officer, loan officer, and buyer are handling their duties, the seller also has tasks to perform. These tasks may be as follows:
- Prepare detailed disclosures regarding the property's condition, including copies of warranties, permits or repair invoices for work previously done on the property.
- Make home available for physical inspection by contractor, geologist or other tradespeople as required by the purchase contract.
- Give escrow officer information on existing loans to check against title search findings.
- Make home available for inspection by licensed termite company.
- Make home available for inspection by lender's appraiser.
- Make any repairs agreed upon in purchase contract.
- Make home available for completion of any required termite work.
As your real estate agent, it is my job to see that all participants are performing their tasks correctly and on time; so that your escrow proceeds smoothly and closes successfully.