If you don’t buy a lot of property and you are not in the real estate business, chances are you don’t know much about the escrow process—which is fine unless you’re buying a house.
Escrow is the neutral place where legal documents pertaining to property ownership and money to pay for that property remain safe until a transfer of ownership is complete. An escrow officer is the individual with a fiduciary responsibility to the buyer and seller, who makes sure both parties’ interests are protected. When all escrow conditions are met, the escrow officer oversees the exchange of the deed for the payment.
Easy, right? Well, yes and no. Determining exactly who pays for what is a matter of negotiation and there are several expenses that go along with the escrow process. There’s the down payment, mortgage insurance, title insurance, loan fees and points, drawing and recording fees, inspection costs, repair costs and sometimes government-mandated retrofits.
While none of these expenses is particularly onerous alone, added together they can amount to serious money. Because each transaction is different, I can’t really speak to average escrow costs, but I can tell you it is essential to be up front and honest with your realtor about the amount of cash you have so they can negotiate appropriately on your behalf.
Long before closing, you should be sure you meet all the lender’s requirements, including providing verification of income and available cash (usually in the form of paystubs, bank statements, tax returns and credit reports). By working on these requirements early, you’ll have plenty of time to explain any derogatory comments on your credit report or why the income on your tax documents doesn’t precisely match that of your paystubs.
You will also have to make arrangements for hazard insurance for you and the lender. I promise, you don’t want to be finding out that your home is in Fire Protection Class 9 (high risk) the afternoon before you plan to close, because it can dramatically change how much insurance you’ll need and how fast you’ll be able to get it. In fact, your lender will want to see insurance confirmation before they fund the loan.
You also need to be prepared to prove that you are who you say you are: your signature on the deed of trust will need to be notarized (the deed of trust is the security agreement tying the loan to the property). Notarization requires valid, government-issued picture identification in the form of a driver’s license, passport, or state-issued ID.
Once you’ve secured all this, you’ll be presented with one of the biggest piles of paper you have ever seen, and to complete the transaction you must sign to affirm that you have read, understood and agreed to all of it, including the fine print.
There’s an activity lull while documents are transferred and reviewed and, assuming no problems pop up, the lender will fund the loan shortly thereafter. Occasionally, you’ll hear the dreaded words, “We have pre-closing conditions.” If you do, talk to your REALTOR immediately to address them.
To close escrow, all of the following must happen: the loan is funded, the escrow company possess the documents, the title company issues the title policy with appropriate conditions, you and the seller sign the closing instructions, and the grant deed and deed of trust are recorded. Only then can the sales proceeds go to the seller, the deed of trust and note go to the lender, and the grant deed go to you, the buyer.
You are now the new owner. The last thing to do is move in the cat.
If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.