When you hear someone say, “We’re in escrow,” during a real estate transaction, it signifies a crucial phase where a neutral third party holds funds and documents while the buyer and seller work towards finalizing the sale. In this article, we will delve deeper into what being “in escrow” entails, how it functions, and what to anticipate during this significant stage.
Understanding the Concept of Escrow
Being in escrow indicates that a purchase agreement has been signed by the buyer and seller, and an escrow account has been established to safeguard the buyer’s earnest money deposit. This phase marks the commencement of the closing process.
The escrow account holds the deposit along with critical documents like the purchase contract, loan paperwork, and the deed. A neutral third party, often an escrow officer from a title or escrow company, oversees these funds and documents to ensure that all contract terms are met before any money or ownership changes hands.
In simple terms, when your agent mentions “we’re in escrow,” it signifies that the transaction is formal and in progress, with funds and paperwork securely held while both buyers and sellers fulfill their obligations, such as inspections, appraisals, and final loan approvals. Once everything is in order, the sale progresses towards closure, and ownership is transferred.
Commencement of Escrow
In most cases, escrow officially begins when the buyer and seller sign the purchase agreement, and the buyer submits their earnest money deposit – usually 1–3% of the purchase price – to the escrow company. The escrow officer then initiates coordination with all involved parties: the buyer, seller, agents, lender, and title company. This sets the stage for crucial deadlines like inspections, loan approvals, and closing.
Typically, the escrow process spans between 30 and 45 days, contingent upon the contract terms and the promptness with which all parties fulfill their obligations.
Actions During Escrow
Once in escrow, intensive behind-the-scenes work commences. While many perceive escrow as merely holding funds, it also serves as a critical period for due diligence and coordination.
The escrow company assumes the lead in managing timelines, documents, and communication, while the buyer and seller navigate through their respective responsibilities. Here’s a typical progression of the escrow period:
1. Initiation of Contingency Period
Upon opening escrow, the buyer enters the contingency period – a timeframe (usually 7 to 21 days, depending on the contract) during which they can thoroughly examine the property and ensure everything aligns before committing to the purchase.
During this phase:
- The buyer schedules a general home inspection and may arrange for specialized inspections (roof, pest, sewer, etc.).
- The seller furnishes all requisite disclosures concerning the home’s condition, past repairs, and known issues.
- In the event of major issues, the buyer can request repairs, renegotiate terms, or even terminate the deal without penalty as long as they adhere to the contingency timeframe.
The escrow officer monitors these deadlines to ensure that contingencies are either resolved or addressed before progressing.
2. Appraisal and Loan Approval
If the buyer is seeking financing, the lender orders an independent appraisal to validate that the home’s value aligns with the agreed-upon loan amount. If the home appraisal falls short of expectations, the buyer and seller may need to renegotiate, or the buyer might have to come up with the shortfall in cash.
Simultaneously, the buyer’s lender is scrutinizing the borrower’s financials and property specifics as part of the underwriting process. They utilize the appraisal, title report, and other documentation to ascertain the home’s eligibility for financing and the buyer’s capacity to repay the loan. Once all criteria are met, the lender grants final loan approval and prepares the loan documents for signing.
3. Title Review and Escrow Coordination
While the buyer conducts inspections and secures financing, the escrow and title teams are engaged in their respective tasks:
- A title search is conducted to confirm the seller’s clear ownership and absence of liens, unpaid taxes, or legal claims against the property. Any identified issues must be resolved before closure.
- The escrow officer oversees and disburses documents, collaborates with lenders, monitors contingency removals, and ensures compliance with all legal and contractual obligations.
4. Final Walk-Through
A day or two prior to closure, the buyer conducts a final walkthrough of the property. This is not another inspection; rather, it is to confirm that the property is in the anticipated condition, any agreed-upon repairs have been executed, and no alterations have occurred since the last visit.
5. Closure and Transfer of Ownership
Upon the satisfaction of all contingencies and the alignment of all elements:
- The buyer wires their down payment and closing funds to escrow
- The lender disburses the loan funds
- The seller signs the grant deed, transferring ownership
- Escrow prepares documents for recording with the county
Upon the official recording of the deed, escrow concludes. The buyer receives the keys, the seller receives payment, and the transaction is finalized.
Distinction Between Under Contract and In Escrow
Under contract signifies that the buyer and seller have agreed on terms and signed a purchase agreement, but the transaction has not yet transitioned into the formal closing process.
In escrow indicates that the deal has officially progressed to the next stage: a neutral third party now safeguards the buyer’s funds and crucial documents, overseeing the process while both parties complete inspections, financing, and other closing steps.
In essence, all transactions “in escrow” are under contract, but not all deals “under contract” have initiated escrow.
Frequently Asked Questions: Understanding Escrow
What is the Role of Escrow in the Homebuying Process?
Escrow safeguards both the buyer and seller by ensuring that no money or property changes hands until all terms of the purchase agreement are fulfilled. It provides a neutral third party to oversee funds, documents, and deadlines, facilitating a smooth and equitable transaction.
Is Being in Escrow Beneficial?
Yes – being in escrow is a favorable and essential phase in the homebuying process. It signifies that your offer has been accepted, and the transaction is advancing with protections in place for both parties. Despite involving critical deadlines and inspections, escrow ensures a seamless and fair sale leading up to closure.
Is Escrow Mandatory?
In most real estate transactions, particularly those involving a mortgage, yes, escrow is obligatory. Lenders commonly mandate it to safeguard their investment. While all-cash buyers may occasionally circumvent a formal escrow account, most still utilize either escrow or an attorney to ensure a secure transaction.
How Long Does Escrow Last?
Typically, escrow spans 30 to 45 days, but the timeline can fluctuate based on the loan process, inspection outcomes, and the prompt resolution of contingencies. In competitive markets or with all-cash buyers, escrow can sometimes conclude more swiftly, within 15 to 20 days.
What Items are Typically Held in Escrow?
Escrow commonly holds the buyer’s earnest money, the signed purchase agreement, loan documents, the property deed, and instructions from both parties. These items are managed by a neutral third party until all sale conditions are met, and the transaction is poised for closure.
When Does Escrow Conclude?
Escrow concludes when all contractual requirements are fulfilled, funds are transferred, and the deed is officially recorded with the county, formally transferring ownership to the buyer.
Can a Buyer or Seller Withdraw During Escrow?
Yes, but subject to specific conditions. If contingencies permit, a buyer or seller can legally withdraw. However, backing out without valid grounds may result in financial penalties or legal ramifications.
Who Selects the Escrow Company?
The choice of the escrow company typically stems from mutual agreement between the buyer and seller. Nevertheless, in certain markets, it is customary for one party (often the buyer or their agent) to make the selection.
Can Escrow Collapse?
Yes, while many transactions conclude smoothly, escrow can falter if:
- The buyer fails to secure financing.
- The appraisal falls short, and the buyer and seller cannot agree on a revised price.
- Issues arise during the home inspection.
- Complications emerge in the title review.
If the deal collapses due to a contingency-covered reason, the buyer typically recovers their earnest money. Otherwise, they risk forfeiting that deposit.