California Escrow Requirements: A Step-by-Step Guide to Escrow

When purchasing or selling a property, one key thing you must understand is the escrow process. This is an inevitable part of almost every real estate transaction, and there's a great reason why it's so prevalent. It is there to protect both parties in the transaction!

If you're new to the real estate market in California and haven't had experiences with escrow so far, it can feel overwhelming, we know. But just because it's daunting doesn't mean you should skip it. Instead, it's best to learn all about the process and get to know the steps.

To help you comprehend the entire escrow process, we're here to share the California escrow requirements and all the necessary steps between opening and closing escrow. Keep reading to get a better understanding of what's to come.

Explaining Escrow: What Is It?

First and foremost, it's important to understand the true meaning of escrow. What is it, and why is it important?

Escrow is the process in which the buyer and the seller deposit funds, documents, and other valuable items to a neutral third party, a.k.a. the escrow holder. These items are held in a trust until all the conditions of the sale agreement are met. Don’t worry; if you entrust your assets to independent escrow agents in California, you will be protected by Escrow Law.

Essentially, escrow is there to protect both parties by ensuring that all the contract conditions are fulfilled. This gives both the seller and the buyer peace of mind knowing that the funds and documents won't be released or recorded until the deal is closed. Once the terms are met, the escrow officer deposits the money to the appropriate party.

There are different types of escrow accounts in real estate:

• Home buying escrow accounts
• Mortgage escrow accounts
• Rental escrow accounts

So, if you want to mitigate the risks that homebuying can include, opening an escrow account is your best bet.

A Step-by-Step Guide to Escrow

Now that you know the basic definition of escrow, it's time to explain how it works, what you can expect, and what some California escrow requirements are.

Opening an Escrow Account

The first step to getting into escrow is opening an escrow account, of course. Once you and the seller sign a purchase agreement, your realtor will deposit your earnest money into the escrow account. The escrow account is managed by your escrow officer, an impartial third party. They collect the first earnest money check, the loan documentation, and the signed deed.

The Legal Requirements for Escrow Accounts in California

In order to open an escrow account, you're required to present and sign certain documentation. These are the legal escrow requirements in California:

1. Sale Agreement - In the Sale Agreement, the seller agrees to provide the goods (property) to the buyer, and the buyer agrees to complete the purchase by a specific date. The agreement contains essential information such as identification information and the terms of the agreement (timeline, price, payment terms, etc.).
2. NDA - A Non-Disclosure Agreement is signed by both parties to ensure they won't divulge or share proprietary and confidential information.
3. Way Escrow Agreement - The Escrow Agreement is signed by the buyer, seller, and escrow holder. This document includes the account and banking details of all the involved parties. Other key components of the Escrow Agreement are the participants' identification, terms, obligations and liabilities, deposit amount in escrow, fees, and legal jurisdiction.

Get the Lender's Appraisal of the Home's Value

The next step is to get the lender's appraisal of the home's value. The appraiser is a licensed professional who will visit the property and determine its current market value. This is important because the lender needs to ensure they're not lending you more money than what the property is actually worth. That is unless you're willing to pay the difference in cash.

Secure Financing for the Purchase

If you're taking out a loan to finance your home purchase, the next step is to secure financing. This means you'll need to get pre-approved for a mortgage and have all the necessary documentation in order.

Your lender will create a good faith estimate or a statement outlining your loan amount, interest rate, closing expenses, and other costs related to the acquisition as soon as you provide the address of the property. If there was a financing contingency in the purchase agreement, it should be removed in writing after you have your formal loan commitment.

Approve Seller Disclosures and Order a Home Inspection

The next step is to approve the seller disclosures. These are documents that the seller is legally required to provide, which disclose any information about the property that could affect its value or livability. This includes lead paint, water damage, mold, pests, etc.

Once you have this information, you can schedule a home inspection. A professional inspector conducts the home inspection, and it's meant to assess the condition of the property. They will check for any damage or potential repairs that need to be made. Make sure you obtain a pest inspection and environmental inspection as well.

This step is important because it allows you to determine if the property is actually worth the purchase price. Also, you get to see if the seller has disclosed everything. If any major repairs are needed, you can ask the seller to make the repairs before closing or negotiate a lower purchase price.

Purchase Homeowner's Insurance

Once you've secured financing, the next step is to purchase homeowner's insurance. This is a type of insurance that protects you from any damages that may occur to your home. It's important to have this in place before closing because the lender will require it. Even though homeowner's insurance isn't required by law in California, it's required by your mortgage lender until the loan is paid off.

Title Report and Insurance

The title report is a document that shows who owns the property and if there are any outstanding liens or encumbrances on it. The title insurance protects you from any losses incurred if the title is found to be invalid. Depending on the location, the title company and the escrow company might be one and the same.

In case of any defects in the title report, the seller must fix them in order to complete the sale. Otherwise, they have to let you back out of the contract.

Final Reviews: Schedule a Walkthrough and Review Your HUD-1 Form

It's time to do final check-ups and ensure everything is in order. This means that you should take a look at the property and also some paperwork.

The final walkthrough is conducted a day or two before closing. It's an opportunity for you to inspect the property one last time to make sure that everything is in order and that all the repairs have been made.

You should also check your HUD-1 Form. This is a document used to itemize all of the charges associated with a real estate transaction. It includes things like the purchase price, loan amount, interest rate, appraisal fee, and escrow fees. It's important to review this form carefully before closing to know exactly what you're paying for. Check if it’s the same as the good-faith estimate you signed.

Closing Escrow

The close of escrow is the final step in the home-buying process. This is when you sign all the paperwork, and the property officially changes hands. You've probably had enough, but don’t rush! Make sure to read all the paperwork carefully before signing the documents.

You'll pay the remaining down payment and closing costs with a cashier's check or wire transfer, and your lender will wire the loan funds to escrow so that the seller can be paid. Once closing escrow is complete, you'll be a homeowner!

Escrow Fees: What They Are and Who Pays Them?

One last thing... when talking about escrow requirements, we have to mention fees. An escrow fee is a charge paid to cover the costs of administering an escrow account. This includes things like setting up and maintaining the account, as well as disbursing funds from it. The fee is typically a percentage of the total purchase price, and the buyer and seller pay it at closing, but the exact amount will differ depending on the escrow company.

Make the Escrow Process Easy and Understand Escrow Requirements

If you’re purchasing a home in California and the prospect of entering escrow seems scary, don’t worry. A reliable escrow company like Lightspeed Escrow can make your journey easier. We’ll guide you through the entire process and help you get to the closing stage stress-free.

Working with an experienced escrow company in California is the best way to make sure everything goes smoothly and avoid any bumps in the road. Check out our array of services and get in touch - let’s get you that house!