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Escrow
If this is your first time
buying a home, you are probably amazed by the large sums of money being tossed
around and negotiated over. Before,
this gets too overwhelming, you should now the basics of escrow, so you know
just what you are in for.
Both you and the seller of
the home that you are interested in should have the assurance that your money
is being well looked after and that while you are in the bargaining process
your investment is being looked after.
After all, you are not just
investing money, but also your time, which for many of us is just as valuable.
The best way to ensure that
everybody in the process is getting a fair shake, is that any money being put
up as a deposit or Earnest Money, is being given to a neutral third party who
will ensure that no property changes hands before both parties are completely
satisfied with all elements of any contract.
This third party is called escrow.
Once everyone is in
agreement the money and the documents are distributed, as per the terms of the
contract.
You can be sure that you are
getting a fair shake, because the escrow is a party that works independently
for both the buyer and the seller.
Therefore, no one party can walk away felling ‘ripped off’.
Functions of the
Escrow:
Receives and deposits (into escrow’s account)
buyers initial deposit and prepares escrow package.
Requests "demands" (pay-off
statements) from existing lenders and/or lien holders.
Obtains sellers notarized signature on grant
deed.
Safeguards grant deed until all terms and
conditions are met and buyer’s remaining certified funds are on deposit.
Orders title search and receives and distributes
preliminary title report.
Calculates prorations pertaining to property
taxes, rents, insurance, interest, and other expenses as required.
Coordinates with buyers lender throughout the
escrow process.
Orders and processes buyers loan documents.
Coordinates buyer’s signing of loan documents
and their return to buyer’s lender.
Receives buyers final down payment funds and
coordinates funding with buyers lender.
Orders recordation of grant deed conveying title
to buyer and distributes all funds: pays-off existing loans; pays other
required costs, such as termite completion, home protection policy; etc.
Releases net proceeds to seller.
AS this is all going on, you
as the buyer are in the negotiation phase with whichever lender you have
determined will give you the best rate on your mortgage. This entire process is independent of your
escrow. Your lender is working for
you. Not the seller.
Although, there may be some
collaborating between all three parties if there is a problem or a situation
that can be financially beneficial for all.
The Lenders Functions:
Orders a credit report and other credit
documentation as required (mortgage ratings, landlord ratings).
Reviews the buyers credit and when necessary
obtains satisfactory explanations from the buyer regarding any negative
credit history.
Verifies the buyers sources of income.
Verifies that the buyer has adequate liquid
funds for down payment, closing costs, and reserves.
Requests an appraisal of the property, and
verifies that the propertys value is equal to the contract sales price.
Submits the loan to underwriters for final
approval.
Coordinates delivery of the buyers loan
documents to the escrow officer.
As these three parties are all working together to get your loan
approved as fast as possible, the seller isn’t just sitting on their
hands. They must take action to ensure
that the sale can go through properly on their end.
Seller’s Functions:
The seller and the listing agent must now
prepare detailed disclosures that are required by law (smoke detector,
lead based paint, earthquake, environmental hazards, zone disclosures,
water heater, transfer disclosure, etc.)
Provide escrow officer information on existing
loans to check against title search findings.
With their Realtor, make the home available for
physical inspection and other trades people as required by the purchase
contract, such as licensed Termite Company and lenders appraiser.
Make any
repairs agreed upon in purchase contract.
While these things may seem independent of each other, they all
must occur in a timely fashion. Much
like pieces of a puzzle you need to take things one step at a time to ensure
that the next step can proceed smoothly.
If you are still unsure about what escrow exactly is, I’ll use a
fairly modern-day example. If you were
to buy a product on ebay, you can opt to use a service called PayPal. Escrow is a lot like PayPal for real
estate. The service, essential assures
that when you are in the process of a monetary transaction, both parties are
guaranteed to receive the money in question.
But what if you do not
want to put your money in escrow?
Naturally, you are not
obligated to do so. Some lender may
allow you to do so if your loan-to-value rate is especially high. It should be at least 80% (which is rare)
But, bear in mind that they might try and boost your interest rate to
compensate for the additional risk that they are taking.
Is canceling escrow a
good idea?
Once you have an escrow
arrangement in place, it is very difficult to get out of it. You would have to convince your lender of
this, which is very hard. In most cases
you’re just going to have to live with it.
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