What is Escrow?
Escrow is the time between when your offer is accepted and the time you receive the keys to your home!
At its essence, escrow is the process whereby parties to the transfer or financing of real estate deposit documents, funds, or other things of value with a neutral and disinterested third party (the escrow agent), which are held in trust until a specific event or condition takes place according to specific, mutual written instructions from the parties. Escrow is essentially a clearinghouse for the receipt, exchange, and distribution of the items needed to transfer or finance real estate. When the event occurs or the condition is satisfied, a distribution or transfer takes place. When all of the elements necessary to consummate the real estate transaction have occurred, the escrow is “closed”.
How Does Escrow Work?
Congratulations your offer has been accepted! Now What?
After your offer is accepted escrow is opened by the homeowners Realtor. Escrow can range in time but typically in Los Angeles escrow is anywhere from 30-45 days. Escrow is the time where first and foremost the buyer has the right to investigate the house they are purchasing to make sure there are no defects or issues with the home.
First you will be required to provide an "Earnest Money Deposit" (EMD) to escrow. Typically speaking an EMD can vary in amount but typically is around 3% of the purchase price.
When you wrote an offer on a property you dictated how long you have to "inspect" the home. This time frame is built into the offer at 17 days but can be changed with any number of days as desired (the more days the less strong the offer tends to be). During the inspection period the home-buyer has the right to hire as many service providers to inspect the home as needed. These services providers can include; a general inspector, plumber, roof inspector, foundation inspector, chimney inspector and many more. The buyer is responsible for the fees of all the inspectors and they are nonrefundable. Once all the inspections are done the home buyer has a few options. If there was an issue with the home they can ask for that issue to be fixed, they can ask for the cost of that issue to be deducted from the purchase price or they can accept the defect and move forward (remember no home is perfect and things will come up, try to always be reasonable). Once this is all agreed to what is called the "Inspection Contingency" is removed.
Concurrently once escrow opened your mortgage lender started collecting paperwork and order what they need to make sure they can loan you the money. One of the first things they will do when opening escrow is to order the appraisal. The appraisal is a third parties opinion on the value of the home. The bank uses that opinion and typically is willing to loan you up 80% of that appraised value. So if you are in escrow on a home for $500,000 you want the appraisal to come in at value and then the bank will loan you $400,000 (80%) and your down-payment would be $100,000 (20%)*. Typically speaking an appraisal will not come in higher than the purchase contract but if it does, great job you might have gotten a great deal on your home! If the appraisal comes in below your purchase contract a few things can take place.
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The seller can lower the purchase price to the new appraised value!
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You can bring extra money to the table to make up the difference in appraisal to contract.
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You can decide you no longer want to purchase the home and begin a search for a new home.
Once that is all agreed to you will remove your "appraisal contingency" this contingency has a 21 day period according to the standard offer document but can be changed to any number of days desired.
Finally there is the "loan contingency". This loan is the final step for you in the process. Just like the two above the clock on this start on day 1, and according to a standard contract you have 24 days to remove this contingency. This step relies a lot on your mortgage lender. This is where he/she takes all the documents they requested from you and sends them to underwriting so they can assure you are approved for the loan! Throughout the process it is very important to get whatever documents you lender is requesting in a timely fashion to ensure no holdup takes place. Once your lender assures you that the loan itself has been approved you will remove this final contingency and wait for final loan docs to arrive.
Five days prior to the close of escrow you will be given the chance to do a "Final Walk-through" of the home. During this you are there to ensure that nothing major has changed int he home since you opened escrow.
After your final walk-through you will then transfer the remaining balance to escrow to complete your full down-payment. You will also be signing your final loan documents. These documents go over the amount of your mortgage, how you want to take title and many other items. Once you are done signing these documents you just need to wait.
After the documents are signed and your deposit is in escrow the loan will fund and the following day the deal will record. Once your deal is recorded you are the homeowner. At this time you will be provided with the keys to your home (unless other agreements have been made during escrow).
At this point escrow is closed, congratulations you just purchased a home!
*Not all loans are 80% loan and 20% down. Different loans offer different percentages this was only used for an example.
**Remember not all states have the same process and this is for a typical escrow in Los Angeles, California.