What You Don't Know About Your Time in Escrow
In Escrow Services, by Anthony Bayardelle
Most people breathe a sigh of relief when their bid for a house is accepted, thinking that the important part of their home buying journey is over. Unfortunately, there’s a lot that can happen during the escrow period that could affect or even jeopardize your home purchase. Here’s a list of all the important, behind the scenes action that goes on between a bid being accepted and you actually holding the keys to your new home.
Opening escrow generally begins soon after your offer for a house is accepted by the sellers. Your realtor will give the property address, purchase price, the duration of escrow (somewhere between 30 and 45 days is typical), the contact information for buyers, sellers, and their agents, as well as any commissions the agents will be paid.
It’s at this point that you usually pay an earnest money deposit. (This deposit is usually 1-2% of the home value but can go up to 10% in some cases.) This is separate from your down payment, but both go towards the eventual purchase price of the house.
When opening escrow, you want to make sure that your realtor has written a fairly detailed sales contract, as this will guide the rest of the escrow process. You want to make sure they covered the basics (like the closing and occupancy dates, who pays what, and other financial concerns), but you also want to check that more granular details have been covered as well. You should ensure things like what personal property (i.e. a pool table, detachable shed, etc.) is included with the sale of the house, what happens if there is a delay in escrow, and what would happen if any conditions are not met are covered as well.
What Not To Do
Just as important as what needs to be done during escrow, is an important list of things that should not be done during escrow. Your loan is still being considered at this time, so you don’t want to make any financial moves that could impact your credit score (and therefore jeopardize your loan).
Actions like taking out additional loans, changing jobs, being late for credit card payments, or running up larger-than-normal credit card bills could all negatively impact your credit score. This will be checked again when you go to finalize your loan, so a negative change could disqualify you from the loan you thought you had. Just until escrow closes, play it safe financially!
It’s also a good idea to stay in town (that beach vacation can wait) and stay accessible while your escrow is being processed. You never know what could come up, but you’ll want to be ready to handle any unexpected developments.
The first and most important thing that needs to happen during the escrow period is the home inspection. This is important not just because you need to look for any major surprises or deal breakers (e.g. faulty construction, insect infestations, asbestos, lead-based paint, etc.) but also so you can get a professional’s opinion on all the things that need to be fixed, updated, or maintenanced.
During the inspection, you should walk through the house with the inspector. Bring a notebook and make a list of everything that comes up. Don’t be afraid to ask as many questions as possible. That’s their job and you need to be informed.
Sometimes multiple inspections are in order. While almost all sales tend to have a standard inspection, other areas could necessitate other types of inspections. Some areas where termites have been a problem require a pest inspection complete with a clearance certificate in order to close escrow. If you know there have been pipe leaks in your new neighborhood, you might want to have the plumbing inspected. If your area is prone to flooding, a mold inspection might be prudent. Homes near a major slope might want a soil or geological inspection.
Your realtor should be an expert in the area, so make sure to ask what types of inspections they recommend you pursue.
Once the inspection(s) have been completed, you can talk to your realtor about anything large or particularly worrying that was discovered. The seller should provide you with a formal list of any known problems with the house, but buyers often discover things that aren’t on the seller’s disclosure.
Even if it isn’t big enough to make you not want the house (i.e. snake colony in the walls or a faulty foundation), it could be significant enough to warrant the seller to pay for them to be fixed before closing or to get you additional cash credits on the deal.
Securing Your Mortgage
Now is when you actually secure your loan. If you got pre-qualified or pre-approved (and if don’t know the difference check out this blog on Mortgages 101) you’re already ahead of the game. If you didn’t, now is the time to find a lender.
Work with a qualified lender to order an appraisal, submitting pay stubs and other financial documents, and lock in an interest rate on your final loan.
Home Insurance and Title Report
A lender typically requires proof that you have secured homeowners’ insurance before they will give you a loan. Depending on the area, other types of insurance (e.g. hurricane, flood, fire, or earthquake) could be required, so make sure you talk to your lender and/or realtor about what steps you need to take in order to secure the right type(s) of insurance.
While the buyer is securing insurance, the seller needs to secure a title report. This ensures that the seller officially possesses the title of the house they’re trying to sell and that there are no liens on the house or other issues that could prevent the sale from going through.
Deal with Contingencies
A contingency is a specific condition that must be met in order for the contract on a house to be considered valid or official. (We also talked about leveraging your contingencies in this blog about how to make an offer on a house.) Common contingencies include passing an inspection, conducting an appraisal to ensure the house is worth what the seller says it is, the buyer getting a loan, or the buyer selling their previous property.
These vary from deal to deal, but it is important to the closing of your deal that these things are taken care of during the escrow period. Your realtor and transaction coordinator (if you have one) should guide you through this process, but it’s important to stay informed and keep an eye on contingencies, as neglect here is a common reason for escrow to be delayed.
Right before you close escrow, you should walk through the house one final time with your realtor to verify that the house is in the same condition as when escrow started and to ensure that all the conditions of your deal have been met. This is to ensure the sellers have done all the necessary maintenance or have fixed any issues that were noted during the inspection and appraisal process.
Again, what to focus on here varies from deal to deal, so prepare with your realtor ahead of time to make sure you check on everything that needs attention.
Other Steps Before Closing
Before you close escrow, you have an opportunity to perform any extra home-related tasks that will make your moving process go more smoothly. For instance, if you plan to move in on or shortly after closing, you might want to take some time about a week before closing to arrange for your utilities (water, gas, trash, cable, phone, etc.) to be hooked up at the appropriate time.
This is also a great time to arrange moving vans, procure a vast array of cardboard boxes, and request a few days off from work so you can get settled in your new home.
The day escrow closes is when the official transfer of funds takes place. The fees, closing costs, and other transaction expenses are paid, and the house is “officially” yours. The deed of the house is officially transferred from the sellers to the buyers.
In most cases, you take physical possession of the house (i.e. you physically take possession of the keys and get free access to your new home) on the day escrow closes, but in some cases, this can happen sooner or later. If the buyers move in before escrow closes or the sellers have to stay after the closing date, it’s typical to draw up an interim lease agreement. If this is the case for you, talk to your realtor about specifics.
Now that you’ve made it through the escrow process, it’s time to break out the moving boxes and packing tape. And so the real fun begins!