So, the offer you made on a home was accepted? Congrats! You’re now in escrow.
Pretty soon you’ll receive a mountain of paperwork and disclosures and reports to read. The professionals who’ve been helping you (your agent and lender) will get the ball rolling by ordering an inspection and an appraisal.
Homebuyers often find the steps in the escrow process daunting, even if they’ve been through them before. Although the length of the escrow process (about 30 days) and a lot of paperwork may feel intimidating, it is a straightforward process that is repeated every day across America. While we all prefer things in life like this to go faster, remember this: each part of the escrow process outlined below exists to protect buyers and sellers.
1. Earnest Money Deposit
Buyers submit a deposit (a.k.a. earnest money) to show sellers that they are serious about buying the property. Buyers can send their deposits with the offer, but more often the earnest money is sent within a day or so after their offer is accepted.
Earnest money goes into an escrow account held by an independent third party like a title company. Earnest money should not be confused with closing costs or the down payment, which are separate payments that are not associated with the initial deposit.
Here’s an important thing to know about earnest money: a buyer’s offer will include terms called contingencies. Contingencies are the conditions that must be met before the deal goes forward. Standard contingencies include a buyer’s right to:
- View the home’s title (explained in further detail below)
- Inspect the property for structural or mechanical defects
- Acquire funds to purchase the home (typically through a loan or sale of existing house)
Sellers are assured of a buyer’s performance because there are contractual deadlines to perform each item, which are called contingency removal dates. The buyer must lift (remove) each contingency by a specified date to move forward to the closing. If buyers do not lift any contingency (e.g., their bank fails to come through with the loan), they can cancel the contract and get their earnest money back. Please note: buyers can lose their earnest money deposit if they fail to perform (a rare occurrence, but one that can happen).
The next step in the escrow process is the delivery of disclosures. There are three main buckets of disclosures.
Agency Disclosure. Buyers and sellers both receive and explanation of the concept of “agency” along with their agent’s duties. Agent compensation is also outlined.
Local Disclosures. Buyers receive a packet with several advisories and notices. The content of each packet depends on the city, county, and state in which the property under contract is situated.
Most states have disclosures about environmental issues (near a farm, lead-based paint, mold, or mildew) as well as notices about physical proximity to earthquake fault lines or whether the home sits within a flood zone. Buyers should also receive information about local ordinances and zoning that affects the property.
Seller Disclosures. The seller’s disclosure report, which details known problems and defects in the home, is sent from the seller to the buyer. If there are problems that the seller is aware of but fails to disclose, there can be legal repercussions. Therefore, sellers must fill out this form to the best of their knowledge.
If there are significant issues detailed in the seller’s disclosure report, the buyer can negotiate to have the seller fix the items before closing. If the problems are substantial and the seller doesn’t want to make the repairs, the buyer can also request a reduction on the price of the home.
Please note: The seller’s disclosure report is only limited to problems the seller knows about, so there may be other defects in the home that are not included in the report. The home inspection, which takes place later in the escrow process (and will be explained below), provides a more detailed list of any problems with the structure and systems of the house.
3. Title Report
When purchasing a home, buyers naturally assume that the seller is the property’s rightful owner. However, in rare cases, this is not always true. Title reports indicate the lawful owner’s information and ensure there aren’t any debts (also called ‘liens’) on the property such as unpaid taxes or bills for things like roof or plumbing repairs. A process called a title search checks for any problems with the home’s title. This process involves hiring a title company to review the property records and ensure the seller legally owns the property with no encumbrances (free and clear).
Buyers are advised to purchase title insurance, which offers protection if the title company accidentally misses any liens that later show up the property. The buyer and seller often split the cost of title insurance.
If the buyer applied for a mortgage, their lender requests an appraisal. Appraisals are an unbiased, professional opinion of a home’s current value and help mortgage lenders know for sure that the house is worth the price the seller accepted. If the buyer is unable to meet their mortgage payments (also known as ‘defaulting on the loan’), the lender will sell the home to recoup the money it lent to the borrower. By completing an appraisal, the mortgage company (or bank) knows that they aren’t giving the buyer more money than the home is worth.
To determine the home’s value, the appraiser carefully analyzes the home’s location, size, features, and condition. They also consider the average sales price of recently sold, similar homes in the neighborhood.
Here’s how this plays out in the real world. If a buyer qualifies for a mortgage of $700,000, but the appraisal determines that the home is only worth $500,000, the mortgage lender will most likely only provide a loan for $500,000. The buyer would need to come up with the $200,000 difference or cancel the deal.
Home inspections are conducted by certified inspectors who carefully review the structure and components of a home and look for any problems or defects. Unless otherwise negotiated, buyers typically pay for home inspections.
Inspectors examine the structure of a house by looking at the roof, attic, insulation, walls, ceilings, floors, windows, doors, foundation, and basement. Then, the home’s major systems are checked, such as HVAC, plumbing, sewage, and electrical. Appliances like the dishwasher are also lightly tested.
6. Request for Repairs
When completed, buyers receive a report of the inspection’s findings. The inspection report includes any problems found in the home, along with photos and explanations of the defects.
As part of the ongoing negotiations that take place during the escrow period, the buyer’s agent can request the seller to cover the cost of repairs. Depending on the situation, the buyer and seller may also share the cost of the repairs. Once the repairs are complete, the buyer can lift the inspection contingency stipulated in the contract.
7. Final Approval / Clear to Close
Even if a buyer previously received a loan pre-approval, the lender’s underwriter makes a final review of the buyer’s financial situation. Lenders want to know that the buyer can still afford the home and hasn’t made any recent (and big) purchases like a new car or lost their source of income (their job).
As you might have guessed from the paragraph above, while waiting to receive clear to close confirmation, buyers should not make any major credit purchases. Mortgage lenders carefully monitor buyers’ credit and their cash position when preparing to fund loans. Any major purchases made during the escrow period is a bad idea.
Occasionally, the underwriter will ask for additional information from the buyer before alerting them that they are clear to close, which is standard practice and should not cause alarm.
When the buyer’s status reaches final approval, the mortgage lender will alert the buyer that they are ‘clear to close.’ Meaning, the mortgage lender is ready to send funds for the loan through, via wire transfer, to the escrow company. Lenders also send buyers a document called an ‘Initial Closing Disclosure.’ Closing disclosures show detailed information regarding closing costs and exactly how much they’ll pay in interest on the loan, the principal amount, etc.
8. Order Homeowners Insurance
Homeowners insurance protects buyers from losses if their house is damaged, or worse yet, destroyed. There are a variety of policies that the buyer can choose from, including standard homeowners’ insurance, condominium insurance, etc. Standard homeowner’s insurance policies typically do not include earthquake and flood protection. Flood and earthquake protection are separate policies that the buyer may or may not choose as an add-on. Choosing additional depends on the home’s location and the amount of risk the buyer’s think they are taking. A lender may also insist on other types of coverage.
Policies also do not cover the homeowner’s failure to maintain the property, as that is considered the homeowner’s responsibility. However, some insurance policy options include appliances and other items in the home for a higher premium.
9. Contingency Removals
As the closing deadline approaches, buyers will lift the contingencies stipulated in the contract. In most cases, the buyers will lift the title, inspection, and loan contingencies by the contingency removal dates for each one.
As mentioned above, should any problems arise, buyers can leave the contingencies in place (not remove them) as a way to cancel escrow and receive their earnest money deposit back.
10. Final Walkthrough
The final walkthrough is the buyer’s opportunity to make sure that requested repairs are complete. Buyers can also verify that all items owned by the seller are removed.
Turn on all lights, run all faucets, test the HVAC, and check all walls throughout the home. When completing a final walkthrough, make sure to walk along the perimeter of the property. Ensure that any items included in the home’s purchase price, such as a chandelier or a piece of furniture, are in working condition.
The closing is the final step before the buyer can finally move into their home. To ensure a smooth closing process, buyers should bring their photo ID and any outstanding paperwork for the mortgage or title companies (if applicable). Depending on the escrow setup, you might be asked to bring a certified or cashier’s check (made payable to the closing company) to cover any closing costs that are not deducted from the sales price.
Buyers and should plan on spending approximately 1 to 2 hours. However, if problems arise during the closing process, the closing can take several hours to complete.
12. Take Possession
Upon closing, the local government records the sale and ownership transfers from the seller to the buyer. Recoding often happens on the same day as the closing. After the paperwork is signed and the bank funds submitted, buyers are handed the keys to their new home and can officially take possession of the property.
There are many steps in the escrow process, lots of legal paperwork, and plenty of small details to track. With the help of experienced real estate agents, buyers and sellers can navigate these steps with significantly less stress.