Unbiased Financial Information Provided by Financial Finesse
Escrow is like an engagement period. Both you and the seller have accepted the idea of marriage. If you can iron out the details, you'll both say, "I do." An engagement ring doesn't always guarantee a marriage, however. And an agreement on an offer doesn't guarantee a sale. Problems with the title, financing or inspections could lead to a break-up.
Analogies aside, escrow is the arrangement under which all documents and funds for your purchase go to a neutral third party, usually an escrow or title company, which coordinates and completes the paperwork, making sure that all conditions of the sale are met before the transaction is final. Expect escrow to take 30 to 45 days, though it is possible to do the whole thing in as little as a week.
What Happens During Escrow?
- A title search is done. A title search reveals the current legal owner of the home and any liens or claims against the property (e.g., tax assessments, outstanding home loans, and third party restrictions that could limit your use of the property). If there are no problems with the title and you agree to any restrictions there might be, the title is transferred to your name and recorded with the county. Title insurance policies are often purchased to protect you and the lender in case of problems down the road.
- Contingencies are removed. When you make your offer, you'll include contingencies that must be satisfied before the sale can be finalized. Examples of typical contingencies include successfully obtaining a mortgage at a particular interest rate, accepting the results of a property inspection, and, maybe, selling your current home. If any one of the contingencies is not met, the deal may be cancelled.
- The loan is funded. If you haven't applied for financing yet, you'll do it during escrow. Once the loan is approved, your escrow officer will work with the lender to make sure your mortgage papers are completed and all lender conditions are met.
At the start of escrow, call or meet your escrow officer and ask if there's any information you can provide. Be a polite pest throughout the process to make sure the necessary steps are happening and the process is not being delayed because someone isn't doing what they should be.
What Kind of Closing Costs Can You Expect?
Closing costs generally range from two to five percent of the home price. Who pays what usually depends on where you live, though there may be room for negotiation.
Closing costs include:
- Loan fees, which generally range up to three percent of the loan amount. The lender is required to give you a good faith estimate of closing costs within three days after you apply for a loan, then usually an update after the loan is approved and another just before you close. Typical charges may include property appraisal, credit reports, loan document preparation and points (loan-origination fees). Each point equals one percent of the loan amount.
- Escrow fees include title search, document preparation, overnight delivery, and notary charges. There will also be fees for transferring title and recording the deed of trust.
- Your lender may require you to pay up to a year's worth of homeowner's insurance before closing. You'll also make a one-time payment for title insurance policies for you and your lender. You might also be required to prepay some private mortgage insurance - a monthly payment apart from your mortgage payments - if you put less than 20 percent down (the insurance protects the lender if you default).
- And, of course, there are property taxes, which you'll reimburse the sellers for if they prepaid them.
Time to Move In
Just before the final papers are signed, your escrow officer will give you a closing statement outlining all the charges and accounting for all the money that exchanged hands in the sale. Read this carefully to catch any mistakes. You'll also have to pay any outstanding balance at this time. On the closing day, the escrow officer pays the seller and tells you the deed has been recorded.
Now you can put the bubbly on ice and try to find the champagne flutes in all those moving boxes.