26 Aug The Escrow Process – A Step by Step Breakdown
The real estate escrow process can be intimidating. Unless you’re a real estate veteran, escrow can be a dark, mysterious place. Time to pull back the curtain and get comfortable with it.
Let’s take a quick walkthrough from start to finish. There are 8 major steps in the escrow process, and – before you get into a real estate transaction – it is important to understand how these milestones fit together.
If you have not already done so, I recommend that you read Escrow Process Basics: Definitions You Should Know for further clarification on the terminology of escrow.
1. A Written Offer is Made by Buyer and Accepted by Seller
The cycle of a real estate transaction typically starts with a signed written offer from the buyer, with a check for the earnest money attached to the offer. The amount of earnest money required is usually included in the seller’s listing for the property.
There may be some negotiation back and forth between buyer and seller regarding the price, timeframe for closing the deal, company that will handle the escrow, and situations in which one or both parties may cancel the deal. When everything is agreed, the changes to the offer are noted and the seller signs it.
At this point, the written offer becomes an active contract between the buyer and the seller.
2. An Escrow Account is Opened For This Transaction
As soon as the seller accepts the offer in writing, an escrow agent (escrow officer) enters the picture. They receive the contract and the earnest money and open an escrow account. The contract spells out all of the instructions that the escrow agent must follow in processing the transaction.
3. The Earnest Money is Deposited in Escrow
The buyer’s earnest money is usually the first deposit into the escrow account. It remains there until the deal is successfully completed or canceled.
The purpose of the escrow account is pretty simple – the buyer has to pay a deposit on the purchase of the property called earnest money, but the seller can’t just take it and disappear without completing the sale. This protects both buyer and seller.
4. The Loan Money is Deposited in Escrow
Most people who buy a house or other property don’t have enough money to pay cash; this means they must borrow the money. Essentially, they must find a third party who will give money to the seller on the buyer’s behalf.
The mortgage loan a buyer gets is between them and their lender – the bank, credit union, or other source of the loan. This is separate from the escrow account and the basic transaction to buy the property, so it is the buyer’s job to be sure they have the loan in place so that the money will be in the escrow account before the escrow closing date.
When the lender transfers the funds into the escrow account, everyone breathes a little easier. Lender funding is one of the last things that could go wrong to make the deal fall through, and it is a relief when this milestone is reached.
What Role Does Your Realtor® Play?
Facilitates the transfer of funds between you and the other party
Advises you on meeting deadlines so you don't forfeit earnest money
Helps you iron out hiccups in the process to ensure you get treated fairly
Is very knowledgeable about escrow and your options and remedies
5. The Down Payment & Payment for Closing Costs are Deposited in Escrow
The down payment is money the lender requires the buyer to put in upfront. The bank’s reasoning is that if it will be laying out hundreds of thousands of dollars for the buyer to buy the house, the bank expects the buyer to put some skin in the game, too.
Lenders love to get 20% of the total purchase price as a down payment, but the current trend is somewhere between 5% and 10%. If the buyer can bring 20% cash to the deal, they are rewarded by the lender in ways that significantly reduce their monthly payment.
The down payment, along with the buyer’s share of the closing costs, must be deposited into the escrow account so that everyone can see that the buyer has fulfilled their promises in the contract.
The seller pays closing costs as well; sometimes they pay all of the closing costs, sometimes they split it 50-50 with the buyer, and sometimes they pay most, but not all, of the closing costs. All of these details are spelled out in the contract.
6. The Purchase Amount Goes to Seller
At the time of the closing – when the deal is finalized – the escrow agent collects the keys and other items that belong with the property and pays the seller the amount they are owed. This amount is the combination of the loan money from the bank and the down payment from the buyer, to equal the full price agreed to in the contract.
7. The Buyer Gets the Keys & Takes Possession
At the same time that the seller receives their money, the buyer receives the keys and can take possession of the property. This may not happen at exactly the same second that the buyer gets paid, but the two things generally happen on the same day, within a matter of hours of each other.
8. The Escrow Account is Closed & the Sale is Complete
The closing of an escrow account is just like closing a checking account at the bank: All of the money is removed from the account so the balance is zero, and the account can no longer be used.
The escrow agent pays the seller the purchase price of the house and pays the lender the fees collected on the lender’s behalf (such as first month’s mortgage payment, a prorated amount to cover property taxes, and a prorated amount to cover homeowners insurance.
What remains in the account are the closing fees, which are third-party expenses incurred in the course of completing the deal. Part of this money is to cover the cost of the escrow processing and title services, and some of the money covers incidentals – think courier fees, photocopying charges, etc.
When all of the money has been distributed to the recipients listed in the contract, the escrow agent closes the escrow account. This is what is meant when people talk about “the closing” or “the escrow closing”.
What If the Real Estate
Deal Falls Through?
If the deal is canceled according to the rules spelled out in the contract, the earnest money usually goes back to the buyer. If the deal is canceled because the buyer’s lender didn’t come through with the loan money, the seller usually keeps the earnest money. If the buyer walks away from the deal without a reason that is listed in the contract, the seller usually keeps the earnest money.
This is a very simple summary of the most common situations, but – as you can imagine – broken real estate agreements can turn into complicated lawsuits and costly penalties. It all comes down to the details in the contract, and sometimes a judge is needed to interpret the contract instructions and decide on a resolution.
Everyone involved in a real estate transaction – the buyer’s real estate agent, the seller’s real estate agent, the lender, the escrow agent, the title company – all want to see the deal succeed and will do the best job they can to make it work. With that much expertise in the mix, most real estate transactions succeed or are canceled without problems, according to the contract requirements.
When you are in the middle of the escrow process, it can be nerve-wracking, or even downright frightening. Armed with a good understanding of the main parts of the escrow machine will help you to relax and make good use of the time – whether you are the buyer or the seller.
A great realtor® will have the experience and knowledge to help you through the escrow process – not only by educating you but by establishing and maintaining good working relationships with the other professionals involved in your transaction. That’s what I call…
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Sources & Links
Title One https://www.titleonecorp.com/BuyerSeller/whatisescrow.aspx