How does it work?
Why do we need it and pay for it?
Today we reveal the mysteries of the escrow process and talk about the buying timeline!!
One of the most confusing things for first time buyers is the escrow process. Even those who know what “escrow” means, don’t really know what happens during escrow.
First things first, what is Escrow??
- The Escrow company is an impartial 3rd party that helps facilitate the home purchase/sale transaction. To put it in plain terms, without this middle man you’d have to meet the sellers with a briefcase full of bills and exchange it for the keys and title documents … doesn’t sound very safe.
What does the Escrow company do? and isn’t there a Title company also??
- Title documents are the documents that show proof of ownership, so a Title Company would be the one preparing, verifying, and recording these documents. However, in the Bay Area, a Title company and Escrow company is the same entity. It is not like that everywhere. In Southern California they are two separate entities, and in other parts of the country a lawyer would handle the entire escrow transaction. Since we live in the Bay Area, going forward, when I say “Escrow “, I’m referring to the entity that is both Title & Escrow.
- Since Escrow is an impartial 3rd party, they can not take direction from either the seller or the buyer. They only take directions from both via signed contracts. This means that if you’re in contract, and change your mind, they won’t give you back your deposit until there is a signed statement from both you and the sellers agreeing to the release of the funds.
- When a buyer writes an offer and a seller accepts it, that signed purchase contract becomes the escrow instructions. It specifies every detail from when buyer will transfer the funds, to when the transaction should close and the buyer should get the keys.
- Aside from impartially following directions, the escrow company will also be the one verifying title. That means that they will make sure that the sellers are in fact the sellers, and no one else has any claim on the property.
- As a part of buying a home you are legally required to purchase Title Insurance from the escrow company. This insurance gives you the piece of mind that if the day after you get the keys, someone comes to you and says they own the home, it will be on the escrow company to deal with them and resolve the issue at their expense.
Now that we covered the basics of escrow, lets move on to the buying timeline:
Since every transaction is very different, this timeline is just a sample, but it contains the basic elements and gives you a good sense of the timing.
*** The key thing to notice is that the escrow process is very front loaded with the various things a buyer must do. ***
In this transaction, I am assuming a 17 day time frame for all contingencies and a 30 day escrow (which is typical in the Bay Area).
- Day 0: The first step of course is to have your offer accepted and open escrow (which means one of the Realtors will call the escrow company and get the process going). This is when the clock starts ticking on your contingencies, so if you only gave yourself 7 days for inspections, you need to move fast!
- Day 1: Let your Loan Officer know you’re in contract and set up a time to meet with them ASAP. If you called your Loan Officer yesterday, you might be meeting today to sign the initial loan docs … they will also be ordering the appraisal. You or your Realtor should have scheduled your inspections today.
- Day 3: Your initial 3% deposit check WILL BE CASHED, so make sure you have the necessary funds in your account.
- Days 5-8: By now the sellers should have provided whatever disclosures and reports they were missing, and most likely you inspections and appraisal will happen somewhere during these few days. The basic inspections you want to start with are: Home Inspection, Termite Inspection, and Roof inspection … from here you can decide what else you need to inspect. This is the time to do your due diligence!!
- Days 7-10: You’ll receive the results of your inspections and appraisal, and based on those will decide if you want to try to ask the seller for either repairs or a credit towards repairs. If the home does not appraise, discuss your options with your Realtor, but if the appraiser won’t budge and you can’t get the seller to compromise, you might have to pay the difference if you really want the home.
- Days 8-17: If you had agreed on the seller doing repairs, this would be the time when those arrangements would be made. Many times though, sellers will not start the repairs until you release your inspection contingencies. This is also the time when your Loan Officer will help you choose the right Home Insurance (as required by law), and if you choose to get a Home Warranty, this is a good time to pick a Home Warranty company.
- Day 17: At this point your loan is good to go (probably as of a few days ago). Up until now, you had the option of changing your mind based on any of your inspections, but today you will be releasing your contingencies, making the final decision to purchase this home. There is no going back now without financial reprocussions (typically losing your initial 3% deposit).
- Days 19-23: Somewhere during this time you will make an appointment to do the main document signing. These are both loan documents as well as escrow documants. Make sure your pen has enough ink, because you’ll be signing anywhere from 150 – 300 pages of mostly duplicate and triplicate information. Once everything is signed, it’s just a matter of waiting for the paperwork to process and the transaction to close.
- Day 25: The last thing for you to do about 5 days prior to close of escrow is the Final Walk-through. Though this walk-through is not an official contingency, this is when you’re going to verify that all of the agreed-upon repairs are completed. If everything is not as it should be, this is the time for the seller to make things right, or cause escrow delays and possible lawsuits.
- Day 29: The day before escrow closes, your loan will fund. You’ll be notified by your lender around noon. You should try to avoid closing escrow on a Monday, which will cause the loan to fund on a Friday and make you pay the extra interest over the weekend. (Alameda county will actually do same-day funding, so you can fund and close on the same day.)
- Day 30: The escrow company will record your title with the county early in the morning and you are now the official home owner. Most purchase contracts will have you getting your keys at 5PM on day 30, but like all other points in your offer, this one is negotiable as well.
One final note about the escrow process is that your credit report will be pulled 3 times: once when you’re getting pre-approved, second time when your loan is being approved, and one last time before the loan funds. This is VERY important to know because if you were to make any large purchase (ie.. car, boat, big tv, furniture, etc) it will change your credit score and possibly disqualify you from the rate you were previously approved for.
So do NOT make ANY large purchases, open new credit cards, close old credit cards, or ANYTHING else that might negatively impact your credit during the escrow process. Even if there’s a half-price sale on that furniture that would be a perfect fit for your new living room. You need to wait till the close of escrow, or you might end up with furniture and no house to put it in.
If you have any questions about the escrow process or the buying timeline CONTACT US today!