What The Heck is Escrow Anyway?
According to the Online Etymology Dictionary:
Escrow: 1590s, from Anglo-Fr. escrowe, from O.Fr. escroue “scrap, roll of parchment,” from a Gmc. source akin to O.H.G. scrot “scrap, shred” (see scroll (n.)). Originally “a deed delivered to a third person until a future condition is satisfied;” sense of “deposit held in trust or security” is from 1888.
A simple example:
You agree to buy a car online for $10,000. The car is on the other side of the country. You entrust your money to an escrow company, and the seller entrusts the title to them as well. Upon delivery and inspection of the car, you decide that everything is in good order, and you report to the escrow company that all is well. The escrow company releases the funds to the seller, and the transaction is complete.
The Life of an Escrow
This section explains the life of an escrow during a real estate transaction, and the very first step begins with an experienced real estate agent’s ability to negotiate the right purchase price on a home. Once that happens, the following process kicks off.
- Provides the Title/Escrow company with an offer to purchase (or acceptance of counter offer) along with a good faith payment called the Earnest Deposit, which is negotiable, but typically 1% – 2% of the purchase price.
- Approves and signs the escrow instructions and other related instruments required to complete the transaction.
- Approve the preliminary report or title commitment and any property disclosure or inspection report required in the purchase and sale agreement.
- Approves and signs new loan documents and fulfills any remaining conditions contained in the contract, lender’s instructions and/or the escrow instructions.
- Deposit funds necessary to close the escrow, such as the remaining down payment or renegotiated earnest deposit, etc.
- Approve any changes by signing amendments in the escrow instructions.
The Buyer’s Lender
Obviously not considered if the sale is all cash (yes, it happens, and it happens a lot.)
- Accepts the new loan application and other related documents from the Buyer(s) and begins the qualification process.
- Orders and reviews the property appraisal, credit report, verification of employment, verification of deposit(s), preliminary report and other related information.
- Submit the entire package to the loan committee and/or underwriters for approval. When approved, loan conditions and title insurance requirements are established.
- Informs Buyer(s) of loan approval terms, commitment expiration date and provides a good faith estimate of the closing costs.
- Deposit the new loan documents and instructions with the settlement agent for Buyer’s approval and signature.
- Reviews and approves the executed loan package and coordinates the loan funding with the escrow officer.
The Escrow Settlement Officer
- Receive an order for escrow and title services.
- Place order for the preliminary report or title commitment for the subject property from Fidelity National Title.
- Acts as the impartial “stakeholder” or depository, in a fiduciary capacity, for all documents and monies required to complete the transaction per written instructions of the principals.
- Prepare the escrow instructions and required documents in accordance with terms of the sale.
- With the authorization from the real estate agent or principal, orders demands on existing deeds of trust and liens or judgments, if any. For assumption or subject to loan, orders the beneficiary’s statement or formal assumption package.
- Reviews documents received in the escrow: preliminary report or title commitment, payoff or assumption statements, new loan package and other related instruments.
- Review the conditions in the lender’s instructions including the hazard and title insurance requirements.
- Present the documents, statements, loan package(s), estimated closing statements and other related documents to the principal(s) for approval and signature, and requests the balance of the buyer’s funds.
- Receive the proceeds of the loan(s) from the lender(s).
- Determines when the transaction will be in the position to close and advises the parties.
- Assisted by title personnel, records the deed, deed of trust and other documents required to complete the transaction with the County Recorder and orders the title insurance policies. Depending on the property location, the recordation of the documents may occur after the closing date.
- Close the transaction by preparing the final settlement statements, disbursing the proceeds to the Seller, paying off the existing encumbrances and other obligations.
- Deliver the appropriate statements, funds and remaining documents to the principals, agents and/or lenders.
- Accept Buyer’s Offer to Purchase and initial good faith deposit to open escrow.
- Submit documents and information to escrow holder, such as: addresses of lien holders, tax receipts, equipment warranties, home warranty contracts, any leases and/or rental agreements.
- Approves and signs the escrow instructions, grant deed and other related documents required to complete the transaction.
- Orders inspections, receives clearances and approves final reports and/or repairs to the property as required by the terms of the purchase and sale agreement (Deposit Receipt).
- Fulfills any remaining conditions specified in the contract and/or escrow instructions; approves the pay off demands and/or beneficiary’s statements.
- Approve any final changes by signing amendments to the escrow instructions or contract.
The Title Company
In Arizona, title and escrow are one in the same. They perform both functions.
- Receive an order for title service.
- Examines the public records affecting the real property and issues a preliminary report or title commitment.
- Determines the requirements and documents needed to complete the transaction and advises the escrow settlement officer and/or agents. Reviews and approves the signed documents, releases and the order for title insurance, prior to the closing date.
- Records the signed documents with the County Recorder’s office and prepares to issue the title insurance policies.
Once recordation takes place, the home has transferred hands and the keys can be given to the new buyer.