What Happens In Escrow?

Once you've made or accepted an offer on a house, in California the next step is to get into escrow.  At this time, it is customary for the Listing Agent to choose the escrow company that will handle the transaction. 

According to Wikipedia, an escrow company is an independent,  unbiased and objective third party whose job is to receive and disburse money and/or documents for the transacting parties, with the timing of such disbursements by the third party dependent on the fulfillment of contractually-agreed conditions by the transacting parties. 

After the escrow holder receives the completely executed purchase agreement and accompanying documentation, they begin the process by first opening a "title order" with the specified Title Company. Escrow will then acknowledge receipt of the Buyer's initial deposit, also known as "earnest money," and will contact both the Listing and Selling Agents to give them the escrow number.  Both parties then receive formal written escrow instructions and other paperwork required to close the escrow.   Below are descriptions of most of the documents  and steps related to purchasing or selling a home:

Preliminary Title Report:  The Title company generates this report within the first five days of an open escrow and gives each party existing information on the property. It will show the Seller's name and vesting, the legal description, the current paid and unpaid property taxes, the parcel number, any easements or CC&R's (codes, covenants & restrictions), and any liens or judgments against the property. It is the job of the Escrow Officer to remove any outstanding items belonging to the Seller, such as unpaid taxes and liens, prior to the close of escrow.

Demands: A demand is a request by Escrow to the existing lender of record asking for figures to pay off the Seller's existing loan. Escrow will not close without the written demands.

Loan Approvals:  The Buyer's lender gives loan approval to Escrow, which consists of the loan amount, interest rate, and term of the loan for the purchase. Upon receipt of the loan approval, Escrow will communicate to each agent that approval has been given.  Typically, a buyer has 17 days by default to provide the lender with everything they need to approve the loan. Approval is always dependent on the property appraising for the price being paid by the Buyer. The appraisal also needs to be completed during that 17-day timeframe.

Loan Documents: The new lender for the buyer issues the loan documentation, which will include the note, a Deed of Trust, tax information, a Good Faith Estimate, lender's instructions and/or closing instructions, and the appropriate governmental forms required by state and federal law.  Upon receipt of the loan documentation. Escrow will prepare the closing statements for each party, sets an appointment with the Buyer to sign loan documents, and prepares the Preliminary Change of Ownership to be attached to the Grant Deed advising the County Assessor to reassess for property taxes.  After the buyer signs the documents, Escrow packages it back up according to the lenders instructions, forwards it back to the lender, and forwards the necessary documentation to the Title company for recording.

Funding:  Escrow will follow-up with the Buyer's lender to confirm they received the loan documentation and find out when the loan will fund. Upon funding of the file, the lender will provide Escrow with final funding figures, then escrow will wire those funds to the Title company.  Escrow will then contact the Title Officer, who will set the file to record.  Funding usually happens one day, with closing following the next day.

Closing:  Upon notification from Title that the file has recorded, final figures are provided from the payoff and title charges. The Escrow officer then balances the file, gathers all the figures, and disburses proceeds according to the contract.  The seller will receive their closing statement, a copy of IRS Form 1099-S, and their check or information on wired funds.  The buyer will receive a closing statement, a copy of their hazard insurance policy, a copy of the home warranty policy, a copy of the termite report and completion, and a refund check, if applicable.

As a Seller or Buyer, much of this process can feel like a foreign language.  That is why it's important to have an agent who will communicate with you every step of the way.  It is their job to walk you through the process and to make sure that you understand it. Remember, no question is a dumb question, especially when it comes to real estate!