When you refinance a mortgage or buy a new home, the escrow process can take 30-60 days and an escrow account will often be required. Escrow accounts are created to protect both buyers and sellers in the homebuying process, along with mortgage lenders and real estate agents. In short, an escrow account is a temporary holding place for all the financial transactions necessary to buy and sell a home.
Understandably, many homebuyers want to know what to expect during the escrow process.
Understanding How the Escrow Process Works
There are two standard types of escrow accounts: mortgage escrow accounts and purchase escrow accounts. Mortgage escrow accounts are set up to safeguard future funds for homeowners after they refinance or buy a new home. These escrow funds are used to pay ongoing property taxes, homeowner’s insurance, and private mortgage insurance if needed.
A purchase escrow account is a temporary escrow account that is opened to safeguard buyers and sellers during a real estate transaction. This type of escrow account is used as a temporary holding account for all funds required during a real estate transaction: earnest money down, main down payment, appraisal fees, home inspections fees, broker commissions, and more. In short, escrow accounts are a safe holding place for temporary funds needed to buy or sell a home.
What to Expect During Escrow: 6 Steps to Closing
Escrow accounts are typically required for conventional loans, FHA loans, VA loans, and first-time homebuyers. You can bypass the requirement in some scenarios, so it’s a good idea to confirm the escrow process with your realtor or your mortgage broker.
Once a seller accepts an offer, one of the first actions is to open an escrow account. This creates a legal holding account for all financial transactions until the sale closes. The term “closing escrow” is the final stage when the escrow account is closed out, all fees are paid, and all funds are disbursed.
1. Home appraisal
Ordering a formal home appraisal is one of the first steps to take once the escrow process has started. The home appraisal establishes the current fair market value of a home. For buyers, it helps confirm a fair price. For sellers, an appraisal shows the home is competitively priced.
Most importantly, a formal home appraisal gives mortgage lenders proof that the home is valued adequately for the purposes of a mortgage. Home appraisers are verified third parties, so they don’t represent anyone’s interest in the transaction. They’ll provide a detailed report based on comparable homes in the area.
2. Home inspection
A home inspection is often required, but not always depending on the details of the offer. A home inspector will provide a walk-through of the entire home to look for issues that might need attention. For example, a home inspector will evaluate the foundation, drainage, plumbing, electrical, and roofing. A home inspection is valuable for both the buyer and seller, and it’s an important step in the escrow process. The inspector will provide a detailed report that offers the buyer and seller the information they need to move forward in the escrow process or go back to negotiations.
3. Homeowners insurance
Once the home is in escrow, it’s time to get homeowners insurance for the property. Your mortgage lender will require homeowner’s insurance on the property since your home is collateral for the home loan. Realtors, lenders and title companies often partner with homeowner’s insurance companies to help keep the escrow process efficient. Homeowner’s insurance is necessary to protect against property damage or theft losses.
4. Title insurance
Title insurance protects the ownership rights to the property. When you close on the sale of a new property, the transfer of the property must be legally protected. You also want to confirm that there are no liens against the property and that it has a clean title. If there is a dispute during or after the sale, the title insurance company could be responsible for resolving the matter as well as paying any legal damages that arise.
5. Final walk-through
Once the inspections are complete, the appraisal is submitted, and the required insurance is in place, it’s time for a final walk-through. Negotiations between the buyer and seller are complete by this point, and any counter-offers have been finalized. This includes any additional repairs that may have been negotiated or perhaps a modified offer after a low appraisal comes in.
During this step in the escrow process, the buyer and seller do a final walk-through to verify there is no new damage to the home. In addition, a buyer is able to confirm that any contracted repairs or updates have been completed as agreed.
This is the final step before keys are transferred. Three business days before escrow closes, your lender will provide final closing documents and disclosures for review. It will include a final list of costs, including appraisal fees, title insurance, property taxes, homeowner’s insurance, and all deposits made.
You can compare the final documents with your final home loan estimate provided by your mortgage lender. This is the final stage of the escrow process. You’ll be able to confirm all the financial data and sign off on your new mortgage.
Once this final step is complete, the loan is funded and proceeds from the sale are disbursed to the seller. The buyer pays any remaining closing costs along with any further down payment. Then the escrow account is closed.
Working with an experienced mortgage broker can help you through the escrow process and make sure you close fast on your next mortgage. We work with clients at every stage of homeownership, and we partner with mortgage lenders across California, Oregon, Washington and Colorado. Our goal is to get you the best mortgage and save you money along the way. Apply here or give us a call to get started.