What Is Escrow?
An escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. It helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company.
In a world where fraud is prevalent, third-party companies like Escrow companies are there to protect both sides of the transaction. Especially when that transaction involves tens of thousands of dollars and more. Let’s get down to the nuts and bolts of a standard home purchase
How The Escrow Process Works
The first part of purchasing a home is getting your offer accepted and then depositing the “Earnest Money Deposit”. This shows the seller that you are a serious buyer and that you are putting some skin in the game, typically between $5,000 on the low end, but it can be as high as 3% of the purchase price of the home. For those that are using an FHA loan to buy a home, that’s pretty much all of your down payment, so you will obviously give the smaller amount.
This kicks off the whole process and escrow begins in earnest. They make sure that all the “I’s” are dotted and all the “T’s” are crossed. They ensure that your earnest money deposit is carefully stowed away in a trust account so that the seller can’t just access it on a whim. They also make sure that everyone is on the same page. If you, the buyer, need to sign some documents or need to release a contingency, they will send out the required documentation to do so. If the seller has agreed to make a repair, escrow will ask you to verify that the repairs have been done and approved by you before it moves forward.
Escrow doesn’t choose sides, they are there for both parties so they are a good player to have in the transaction.
How Much Does Escrow Cost?
Escrow costs vary from company to company. Aside from your down payment, you want to set aside another 1.5% to 2% of the final price for escrow costs. This is a conservative estimate and it may be subject to change depending on what is negotiated. For example, a buyer’s agent can successfully negotiate that the seller of the home pay for all, or a portion, of the buyer’s closing costs which may or may not cover all of the escrow costs. If you’re a buyer, you may ask yourself if you will ever find yourself in a situation where you will pay the seller’s closing costs. Fret not, that is illegal and will never happen in California. Sometimes lenders can help with some of the closing costs, if you find yourself a bit short to cover all of the closing costs AND your down payment, ask us how we can help with that.
What Happens At The Close Of Escrow?
Assuming a smooth transaction with everyone fulfilling their parts perfectly, the 30th day will be your expected “Close of Escrow” (aka COE). Just before this day, the lending company will have funded the transaction by wiring the remaining amount of the purchase to Escrow. They hold on to it until the 30th day when they hear the magic words, “Confirmation of Recording”. This means that the Title company, another company involved in the transaction, has recorded the new deed with the county clerk that presides over that area. This gives escrow the green light to give the funds to the seller, and the buyer then receives the keys to their brand new home!
In Conclusion
Escrow can do far more than what was covered in this brief summary. In general, a bulk of their business is exactly this. At American Freedom Funding we’ve worked with hundreds of different escrow companies and have found a handful that we love to work with who have reasonable prices and that show the utmost professionalism from start to finish. If you’re thinking of selling, refinancing, buying or investing, your first call should be to us so that we can get you started in the right direction. We can’t wait to help you achieve your real estate and financial goals.