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Looking for a new home is exciting, especially if you're a first-time buyer, but the process can quickly become overwhelming. There are houses to tour and offers to make. Once an offer is accepted, the home-buying process enters the escrow period. The escrow period begins when the seller accepts an offer and continues until the buyer receives the title and keys to the house. A lot can happen in the "in escrow" process.
What Does "In Escrow" Mean?
Escrow is a legal term indicating that items of value such as money or property are held by a neutral third party called an escrow agent until specific requirements are met. Escrow agents may be title companies, financial institutions, or attorneys. The agents protect both the buyer and seller by holding items such as earnest money, property deeds, and loan documents until payment is made and deeds are transferred.
Why Are Escrow Accounts Needed?
Buyers usually include earnest money when they offer to purchase a home. The check is deposited into an escrow account controlled by a third party. After the seller signs the purchase agreement, the conditions attached to the sale of the home must be met before the property changes owners. These contingencies may include:
- Loan approval
- Appraisals
- Sale of existing home
- Inspections
- Insurance
- Title report
For example, loan approval fails because the appraisal is less than the asking price of the home. Buyers can pay the difference between the appraised value and the asking price, or they may decide not to purchase the home. When buyers choose not to buy the house, the escrow agent returns the earnest money to the buyer. If the earnest money was given directly to the seller, buyers may or may not receive their earnest money back.
Who is the Escrow Agent?
Given the crucial part an escrow agent plays in home purchases, be sure to consider the following factors before deciding on an agent:
- Costs. Escrow agents set their fees, so compare pricing.
- Reputation. Make certain the escrow company is one you can trust.
- Experience. Knowledgeable agents ensure that all parties are protected.
- Communication. Understand how you can contact the agent. If they are remote, can you call, or must you use email? If they're local, can you stop by or call?
Finding an agent that meets your expectations can help make the process smoother.
What is the Escrow Process?
The purchase agreement stipulates the escrow agent or company, so once both parties sign the agreement, the agent sets up the escrow account, and the earnest money is deposited. Depending on the conditions of the purchase agreement, the in-escrow process uses the following steps:
- Loan approval and appraisal. If financing is required, the lender will require a home appraisal before approving a loan.
- Financing and home sale. Once financing is secured, the buyer must notify the agent that the requirement has been met. The same notification applies if the home purchase was contingent upon the sale of an existing property.
- Disclosures and inspections. Buyers can waive inspections which means they are accepting the property as-is. They can also accept seller disclosures of problems. Or, buyers can ask sellers to address issues or lower the price to compensate for the flaws found during inspections.
- Title and insurance. Buyers may be required to purchase insurance as part of loan approval, and they should always ensure that the property title is free and clear of liens.
Once these steps are complete, buyers and sellers are ready to close escrow which requires signing paperwork and transferring funds. Escrow is closed after the title change is recorded and the transaction is complete.
The escrow process is essential to home purchasing, but it can be overwhelming. Sometimes, buyers get lost in the process. If you're looking to buy a home, talk to a First Savings Mortgage loan officer who can answer your questions and get you started on the home-buying process.