This information is being provided in order to inform you about some of the aspects of escrow, including a clarification of the role of the escrow holder and knowledge that will help you through the escrow process. Entire books are written that explain the many elements of escrow; this writing is intended to provide an overview of the escrow processes only.
1. What is escrow? Escrow is the final stage of a real estate transaction where a neutral third party oversees the transfer of ownership from the seller to the buyer. The escrow company holds any funds and documents safely until the terms of the contract, as agreed on by all parties, have been completed. Once the requirements of the contract have been met, therefore allowing escrow to close, the escrow company has the documents recorded to transfer ownership and then disburses the funds to the proper parties. The buyer is provided clear title and the seller’s encumbrances are paid in full, unless otherwise agreed upon in the contract. If the buyer is purchasing the property with a loan the buyer’s encumbrance is also recorded against the property at this time. If the escrow transaction is a refinance transaction then the ownership is not transferred but merely the encumbrance on the property is changed from the old lender to the new lender. At closing the previous lender is paid in full and the new encumbrance is recorded against the property and the escrow company disbursed the funds to the proper parties.
2. How does escrow work? During the escrow process, buyers may do a property inspection which might reveal minor defects or major defects. If major defects are found then many times the seller and buyer negotiate (through their real estate agents, if obtained) a credit or repairs to be done. The sellers may find out about liens or other encumbrances on the title that must be cleared before the title can be transferred to the buyer. These types of events are not unexpected in a purchase. Escrow Instructions are produced by the escrow company using the terms agreed upon in the purchase contract. The escrow officer processes the escrow according to the escrow instructions. When all the conditions in the escrow instructions have been met, the escrow will be "closed." Escrow companies are responsible for following the escrow instructions in a timely manner; handling the funds and/or documents, paying all bills as authorized; responding to authorized requests; closing the escrow when all terms are met, and providing an accounting for the escrow. 3. What is a closing statement? A closing statement is a statement given to parties at the close of escrow that is a written account of the financial amounts of the transaction that includes the purchase price, funds deposited or credited, payoffs on existing liens, service charges and a determination of the refund or proceeds given to the party at closing. The closing statement and all other escrow papers are an important record of a real estate transaction, which should be obtained for tax reasons.
4. How is the closing date picked? The buyer and seller must both agree on the closing date. The buyer usually requests a time period to close by, i.e., 30 or 45 day escrow in the original purchase agreement. The seller can then agree with this request or counter the time period if the proposed closing date does not meet their needs. Throughout the escrow process the closing date can change as long as both buyer and seller agree. An addendum to the purchase contract or amendment to escrow instructions should be done to change the closing date. Buyers can also request that the closing date be contingent upon the sale of his/her current home. While this date may be rather arbitrary, a tentative 30 or 45 day closing date can be set. An addendum to the purchase contract is then drawn & signed and the escrow officer notified when the buyer's home sells.
5. What is an escrow account? Who do I contact regarding my escrow account? The escrow account is also called an impound account. The impound account is an account set up by the lender to collect the taxes and insurance up front (on a monthly basis) and then the lender pays the bill once it becomes due. The lender is the account holder and therefore is the correct person to contact regarding the account.
6. Does my impound/escrow account refund come from escrow after the loan is paid off? No, the refund of an impound account is sent directly from the previous lien holder to the borrower. It does not get disbursed from or through the escrow company.
7. As the new buyer, what percent of property taxes do I pay at the close of escrow? The escrow company prorates the taxes based on the current tax bill available. 8. The value of the property went up/down why am I paying property taxes on another value? The escrow company cannot determine the value of the property. The escrow company is required to prorate the property taxes based on the current bill. Any refund or reassessment of the property is the responsibility of the tax collector.
9. There is outstanding property taxes on the prelim. Is the seller paying those? Yes. The property taxes are paid current at closing. The title policy issued to the buyer at closing ensures that the property taxes are paid current and all encumbrances are clear. If there is a property tax bill or any other encumbrance that is in existence at the time of closing but overlooked by the title company the buyer can place a title claim against the policy issued by the title company of the transaction.
10. Why is the Mortgage Insurance Premium (MIP) on the closing statement? I thought it was financed in the loan. The MIP is financed in the loan. The base loan amount (loan amount prior to MIP being financed) is increased to account for the MIP fee. The final loan amount (loan amount with MIP being financed) is then shown on the closing statement along with the MIP fee which cancels each other out.
11. What happens after I sign my loan documents? The escrow company packages the documents and distributes the packages to the appropriate parties. The lender reviews the loan documents and conditions the broker and escrow for any remaining items that they require to fund the loan. During this time the buyer/borrower bring any needed funds into escrow (preferable via wire transfer). Once the buyer’s funds are in escrow and the final lender conditions are met , the lender funds the loan and escrow can proceed to closing.
12. When do I bring my money into escrow? Normally, after signing loan documents. Escrow provides the final figure to the buyer/borrower to deposit at the time loan documents are signed.
13. Is a cashier's check or a wire better and why? A wire is the best option to transfer funds to escrow. A cashier's check is acceptable, but funds have to be deposited and clear the escrow account prior to closing which can take 24 business hours.
14. How do I wire money? What is the cutoff time? In order to wire transfer funds you will need a. Beneficiary name, b. account number, c. ABA Routing number of the bank you are wiring to. The escrow company can provide the wiring instructions to you. The buyer/borrower takes the above information to their bank and instructs their bank of the amount to transfer to the escrow company. The cutoff times to wire out vary from bank to bank. You would need to contact your bank to find out the cutoff time for that particular bank.
15. What does it mean when the loan funds? The lender has disbursed the funds for the loan to the title/escrow company.
16. When can I get the keys? Keys are normally handled by the agents and possession is normally given after confirmation of recording has taken place.
17. Why is the interest on the payoff one/two days more than the closing date? The title company normally includes a “cushion” of a couple of days to ensure that the encumbrance is paid in full. Any overpayment is refunded to the seller from the lien holder after the payoff is processed.
18. If we cancel, can we get our deposit back? The escrow company must have mutually signed cancellation instructions to release the funds that have been deposited in escrow.