Closing and Escrow Basics

“Closing” is not something most buyers focus on during their home search. It’s the part that comes after you and the seller have a mutually agreed upon offer, and once it’s done the house is yours. Most people assume closing just kind of works itself out, but this is a naive assumption.

The keys are almost yours! You just have to survive closing...

Closing–or rather, the “escrow process” in real estate parlance–is complex and if something goes wrong, it can really damage your deal. Savvy buyers are actively involved throughout the escrow process.

We will go through the basics of escrow, and also cover what you, the buyer, can do to make things run smoothly.

The Basics

Escrow involves four primary parties: the buyer, the seller, the lender and the escrow company. The escrow company acts as a neutral third party (paid 50/50 by buyer and seller) who holds documents and funds until the transaction is completed.

The four primary parties will also interact with a smattering of other people during escrow, including the realtors, home inspectors, insurance companies, and appraisal companies.

The escrow officer is like the eye of the storm–this is the person in charge of coordinating documents, holding money, and making sure things get done on time. In reality, escrow officers and lenders have a lot to do and don’t always make your particular closing their top priority. As a buyer, you’d be well advised to stay on top of the escrow process and make sure things are getting done in order to meet your closing date. A few polite emails to your escrow officer and lender will help ensure your case stays at the top of the pile, and will give you peace of mind that things are moving forward.

Escrow typically takes 1-6 weeks, depending on the type of loan you have, and a number of variables out of your control. With the recent surge in foreclosures and government incentive programs, the real estate closing machinery has gotten a little backed up in places, so be ready for it to take longer than usual.

Finding an Escrow Company

Your relator can usually recommend an escrow company, or if you’re buying into a condo building, the developer may have an escrow company that they’re working with. There are different customs in different areas dictating who selects the escrow company, but it is wise to ensure that the company selected is reputable (ask around or do a Google search).

Who Does What

• The escrow officer opens an account and collects your deposit (earnest money), obtains the loan information from the lender, and the contract for the transaction. Near the end of escrow, the escrow officer completes a closing statement (or HUD), showing all the costs associated with closing, including your down payment. This is how you’ll know how much money to the penny you’ll need to bring to closing–up till now, you’ve only seen estimates.
• The lender orders an appraisal, to ensure it’s worth what you’re paying for it. (This appraisal’s purpose is to ensure you’ve got enough collateral for your loan.) The appraised value is not something that the seller needs to know–all that matters is that the appraisal came in “at value.” Sometimes, a lender will let you know separately if the appraisal actually came in “over value.”
• The buyer (you!) purchases title insurance (in some cases, escrow companies can sell title insurance to you). This insurance basically insures that the title is “clean,” meaning no one can come out of the woodwork at some point down the road and claim that you don’t legally own your home. You will also need to purchase homeowners insurance during escrow; you can have coverage start on your closing date. Before closing, you’ll have the chance to do a final walk-through to ensure that any repairs you requested have been made and that the property is being delivered in acceptable condition.

On the Big Day

• The buyer must supply the funds indicated in the closing statement/HUD in order to proceed with closing. You cannot come to closing with a personal check. Or rather, you can, but you’ll have to deal with a room full of really angry people. That’s because the check has to clear before the transfer registers in escrow. You’re better of wiring money and/or using a cashier’s or a bank check. This means you should be sure that you’ve got all the necessary funds in a liquid account once you enter escrow. (As I found out during my closing, it takes a looong time to move money, so get that taken care of well in advance of your closing date.)
• On your appointed closing day, you’ll sign a million documents in front of a notary. You’ll hand over your checks (unless you wired the money). A couple days later, the transaction will be recorded in the official Government Book of Transactions, and the home is yours!
• Random advice: Keep all your closing documents for all of eternity. Seriously. Don’t assume the escrow company will keep track of them for you. They won’t.

To review, closing is done when:

• Buyer and seller have signed documents
• Buyer’s money is deposited into escrow
• Lender has approved the signed documents
• New deed and financing docs have been recorded
• Lender has wired loan funds

Bottom line of closing and escrow:

• As the buyer, you won’t have to do a lot of work
• Your unofficial job, however, is to make sure that everyone else is doing their jobs with polite “check in” emails
• You must respond to all communications quickly to keep things rolling
• You must have your funds ready in a liquid account, ready to make the transfer
• Missing your closing date is a bummer that can range from minor to debilitating–do everything you can to meet your closing date