When buying a home, there are several important steps to the process. The first step, of course, is searching for your “dream home” within your price range and hopefully finding it. The second step is negotiating the sales contract: How much will you pay? How much money will you need to put down in cash? What repairs does the seller promise to make before the sale? The final, and most legally complex steps, are the escrow period and its culmination, the closing.
Even though you’re likely to have a real estate attorney, real estate agent, and representatives of your bank by your side during the escrow period and closing, it's important for you to understand the basic mechanics of this part of the process of buying a home.
What Is the Escrow Period?
The days and weeks in between the contract signing and the closing (which date is usually specified in the contract) is referred to as the "escrow period." It usually lasts between 30 and 60 days (or less if you pay all cash for the property).
As the home buyer, you will be busy with various tasks during this time, depending in particular on what contingencies you placed into the contract. If, for example, you added an inspection contingency, then you will need to hire an inspector, review the inspector's report, negotiate over any needed repairs, and perhaps even decide whether to cancel the contract based on the extent of the home defects the inspector found. In addition, you will need to work on getting title insurance and homeowners' insurance.
The other professionals involved in the transaction will also be busy. Your bank, for example, will likely order an appraisal of the property, and perform its final review of your loan in preparation for loan approval and issuance.
And, the typical real estate sale contract names an “escrow agent,” "title agent," or “escrow company,” which is simply a third party that will help to safely bring about the exchange of money for title to the property. Escrow instructions tell the agent how to hold and care for the relevant items.
To understand what the escrow agent does, imagine that you want to buy a rare diamond. You don’t want to give the seller your cash without proof that the diamond is real; the seller doesn’t want to give you the diamond without first receiving the cash. An escrow agent can solve this problem by holding the cash and the diamond until the condition—the independent verification of the diamond—is met.
When handling a home sale, an escrow agent usually does some or all of the following to bring about a successful exchange:
- hold the buyer’s earnest money check until the closing
- order a title search (to make sure that the seller has clear title to the property)
- hold the money that the bank has loaned the buyer
- obtain and hold a deed from the seller transferring the property to the buyer, and arrange for the deed to be recorded in the appropriate county office or agency at closing, and
- calculate the amounts owed by both the buyer and seller for things like property taxes and homeowners' association transfer fees and track the actual payments.
A word of caution, however: An escrow agent is typically not an attorney, and so can’t tell you how the deal is progressing or advise you as to whether your transaction is being handled correctly. If disputes arise over the contract terms, the money to be transferred, or someone's inappropriate actions in the course of the deal, you may need to get help from an experienced real estate law attorney.
Once the escrow agent performs all the duties as instructed, the escrow period is considered to be closed. This will usually take place on a date set in advance.
What Is the Closing?
Closing a real estate sale is closely related and connected to closing the escrow: it’s when the deal is completed and both parties get what they bargained for—money for the seller and a home for the buyer.
Most likely, the sales contract contains a closing date, which is when the final papers are signed and money changes hand. It’s the date the buyer becomes the owner of the home. For the closing to proceed, all issues regarding matters such as financing and insurance will need to have been resolved already.
Can you move into the house on the closing date? Not necessarily. The sales contract should state when the seller is to move out and the buyer is to take possession of the property. In most cases, the buyer takes possession at closing, but the parties can also negotiate alternatives, such as the seller remaining in the home for a period of time, until he or she can close on another home purchase or complete the construction of a new home.
Protections for the buyer may also be reflected in an escrow arrangement, such as money being held in escrow to be paid to the buyer if the seller remains in the home longer than agreed.
The escrow agent will tell you what form of payment it will accept for any parts of the purchase price that you're paying in cash; perhaps a cashier's check or wire transfer, unless the contract provides otherwise. In today's paperless world, wire transfers directly to escrow agents are becoming increasingly common.
In addition, if you, the buyer, have taken out a mortgage to finance the purchase, you must be given certain disclosure statements as required by the Real Estate Settlement Procedures Act (“RESPA”) and its many subsequent amendments. RESPA is a federal law designed to provide clear disclosure of closing or “settlement” costs and to reduce the amounts buyers are required to deposit in mortgage escrow accounts. (Mortgage escrow accounts are a sort of forced savings account, in which the lender collects prorated amounts from you as an add-on to your monthly mortgage payment, then later uses this money to pay your property tax and insurance bills. They are sometimes required by a bank, especially for first-time buyers or those making low down payments, where there's concern that the buyer might not be able to afford future payments.)
At least three days before the closing, you should receive a statement showing all closing costs. As the Consumer Financial Protection Bureau notes, the purpose of these three days is to give you time to double-check these costs to ensure that it matches your records. If your bank requires you to set up a mortgage escrow account, at the time of closing you will receive an itemization of the estimated property taxes, insurance premiums, and other charges that the lender will need to pay from the account during the first 12 months of the mortgage.
Questions for Your Attorney
- How much will it cost for you to represent me at closing?
- A seller won’t sell me his house unless I agree to use the escrow company of his choice for the closing and to pay for it. How are such arrangements customarily handled in my area?
- What should I do if I don’t get the proper disclosure statements from my lender as required before the closing?
- How long will the actual closing take?
- If I can’t make the closing date, can the seller cancel the deal?