June 13th, 2022
Closing on a new home is one of the most monumental moments in a person’s life. But real estate is not as simple as – the buyer provides the money, the seller signs over the deed, and it’s done. There are many layers to the transaction and one of the major steps is the close of escrow.
In this article, you will learn what the close of escrow is, why it is important, and what the process includes. By the end, you should understand what is happening behind the scenes before you get the keys in hand. So let’s start.
One of the reasons everything around escrow can be so confusing is because escrow can refer to multiple things. If you’ve ever taken out a mortgage loan or know someone who has, you’ve likely heard of an escrow account – the account that is used to hold monthly property tax and insurance payments and exists for the life of the loan.
This is the most common type of escrow account and most homeowners have opened one at some point. However, this is not the type of escrow account that close of escrow is referring to. Two escrow accounts are used when you are buying a home (unless you are not taking out a loan to buy the property).
The first one is the one that was just discussed and relates to your mortgage loan. The second one is a short-term escrow account that is used to hold the necessary funds and documents until the real estate transaction is complete. This is the escrow account that close of escrow refers to.
Buying a house is a complex process and can include a lot of conditions and contingencies. The buyer, seller, and their escrow agent all have legal obligations and responsibilities.
Close of escrow is the point when all parties have met their legal responsibilities and ownership of the property can change hands.
Close of escrow could happen on the same day as the closing date, but they could also be different. Close of escrow happens when you and the buyer have completed your obligations towards each other – you have provided the good faith deposit and all required documents to the escrow agent and the seller has done the same with the keys and title documents.
Escrow has done its job and is now closed. But you could get the actual title, deed, and keys from your escrow agent on another day – this is your closing date.
The close of the escrow can start after you and the seller have signed the purchase agreement and are now ready to finalize the transaction. The escrow process timeline starts with the good faith deposit and ends with signing the closing documents. Typically, it lasts between 30 – 60 days, but it can be shorter or longer depending on your agreement with the seller. As was mentioned, it starts with:
You will provide a specific amount of money that essentially represents your seriousness about buying the house – thus the name good faith deposit (it is also called an earnest money deposit). Your escrow agent will put this money into the escrow account. The good faith deposit is separate from the down payment.
The good faith deposit sum will be a fixed sum or percentage-based.
The next step is approving the Seller’s Disclosure – the legal document wherein the seller lists all problems with the home or previous occurrences that could affect the buyer’s willingness to buy the property.
In many states the seller is obligated to provide truthful disclosure of anything relevant; otherwise, the buyer could renege on the contract at a later date without any legal repercussions or the seller could be on the hook for any major flaws that were not disclosed.
However, there is a principle called caveat emptor, that is, buyer beware in Latin. According to this principle, the buyer should do their homework and the seller is not obligated to disclose any defects with the property.
While in theory caveat emptor can be applied everywhere, most states have buyer protections (like the Seller’s Disclosure) that effectively negate this principle. The states that lean towards allowing caveat emptor are:
After approving the Seller’s Disclosure, the next step in the close of escrow is the home inspection and appraisal. A home inspection is when a professional inspects the house in detail to find any damage and see if repairs are needed. The buyer can ask the seller to fix any issues that were uncovered.
A home appraisal is not the same as a home inspection – the purpose of an appraisal is not to find any faults with the house but to assess the fair market value of the property. Most lenders require a home appraisal before they are willing to give a mortgage loan. In practice, most lenders will not give a higher loan than what the appraisal determines the property is worth.
If everything is still going smoothly, the next step is to review all relevant escrow documents you are provided with. These can include the seller’s affidavit, bill of sale, transfer deed, mortgage application, mortgage deed, closing disclosure, etc. You should consult with an attorney or agent when reviewing these documents.
The second to last step before the close of escrow is to take one more look at the property. While this step is not obligatory, it is highly advisable. Take a walkthrough of the house to examine whether it is in the same condition as you agreed upon.
Check whether nothing was damaged since your last inspection and if the seller is honoring the terms, e.g. if you agreed what appliances will be left in the house, check that they are still there. At this point, you likely can’t back out of the deal unless you find major damage, but you can possibly get the seller to fix the issues.
After the final walkthrough, you are nearing the close of escrow. You, the seller, the real estate agents, the title company, and the escrow representative need to meet and sign the required documents to make the sale official. At this point, you also need to make the down payment and pay the closing costs.
Once everything is finished, you are presented with the deed to your new home.
There are some issues that can delay the closing of escrow. For instance, it’s possible that the buyer or seller did not provide all the necessary documents for finalizing the sale, which could delay the process. There could be issues with securing financing because of the appraisal.
It is also possible that your contract had contingencies (the conditions for the sale) – maybe your contract has a contingency clause that the sale only goes through if the home inspection does not uncover any undisclosed damage. Then it’s time to renegotiate or wait for the issues to be dealt with.
The close of escrow process may seem unnecessarily convoluted, but its purpose is to protect both the buyer and the seller. And with the right escrow company helping you, it can be almost painless and you can prevent delays.
Lightspeed Escrow was founded by real estate experts so we know the ins and outs of real estate transactions. If you are buying or selling a house in Southern California, we can ensure that everything goes according to schedule.
Contact us when you need expedient escrow services or if you have any questions you would like answered.