Understanding Escrow

Escrow is a process that provides for a fair and equitable transfer of property from one party to another. Principal parties (seller, buyer, lender) deliver documents and money to an Escrow Officer (to be held for further delivery until certain conditions have been met), we say the documents are held “in escrow.” We may also say the parties have “opened an escrow.”

Each of the principals (seller, buyer, lender) of the escrow will give the escrow holder written instructions setting forth the conditions under which further delivery is to be made. These instructions are usually typed by the Escrow Officer or Escrow Assistant from oral information supplied by the principals or from a contract signed before they arrive at the escrow office.

The Purpose of an Escrow

The common use of an escrow is to enable the parties in a real estate transaction to interact with each other with less risk. The escrow holder acts as:

  • A custodian for funds and documents
  • A clearinghouse for payment of all demands
  • An agency to perform the clerical details for the settlement of the accounts between the parties

Escrow Begins with Title

Escrow usually begins with the Escrow Officer opening the order for title work. Based on the information provided, the title company prepares a title report. There are two basic types of title reports:

  1.  Preliminary Title Report. This title report provides the customer with an analysis of the present status of the property as revealed by the public records filed or recorded in the county in which the property is located.
  2. A Commitment Report.  A commitment (issued in some jurisdictions) specifies the requirements which must be met in order to issue the requested insurance.

Upon receipt of the title report, an analysis is made to determine the necessary action and documents required to complete the transaction: demands for satisfaction of liens not acceptable to buyer and/or lender; documents for recording; instructions and requirements of the new lender.

In most areas, buyers and sellers instructions are prepared for signature from the information gathered. When all the title and financial requirements are met and instructions from all parties can be fully complied with, the escrow is said to be “in perfection” and can close. Then the financial settlement takes place, the documents are recorded and the title insurance policies are issued.

The Typical Escrow Process

Real estate transactions can vary. However, a typical escrow follows this process:

  • Open an Escrow
    • Once an offer is accepted, escrow is opened with a title company.
    • Earnest money is deposited at this time.
    • Escrow orders a Preliminary Report and sends copies to your agent and lender.
    • Escrow instructions issued to all parties along with an opening package.
  • Contingency Period
    • Buyer receives and approves Seller’s Real Estate Transfer Disclosure Statement.
    • Buyer approves Preliminary Report.
    • Physical inspections/pest inspections are completed.
    • Property appraisal and loan approval are in progress.
  • Homeowners Insurance Coverage
    • Buyers obtain a Homeowners Insurance Policy for their new home and the insurance information is given to escrow.
    • Escrow orders a copy of the homeowners’ insurance policy for the new lender prior to escrow closing.
  • Signing Documents at the Title Company
    • Buyers need to bring current photo identification to sign notarized loan documents at the title company.
    • Copies of the title and lender documents are given to buyers.
  • Down Payment and Closing Funds
    • The Escrow Officer provides you disclosures, including The Loan Estimate (formerly the Good Faith Estimate and Truth in Lending which has been integrated into one documents). It will advise you of total monies due to close escrow.
    • Buyer arranges a wire transfer to the title company several days prior to closing.
  • Funding
    • The lender(s) sends funds to the title company.
  • Close of Escrow
    • The deed is recorded at the County Recorder’s office by the title company (buyer will receive the original back from the County Recorder).
    • Keys are transferred from seller to buyer.
    • You will receive a Closing Disclosure. This document should be kept by the Buyer and Seller for tax purposes.