Tuesday, January 12, 2016

The Importance of the Escrow Process

   When you buy a home there are a multitude of steps that seem to be invisible but turn out to be duties performed by various facets in the buying process. Escrow seems to be one of those mysterious operations which takes place between the time the seller accepts an offer and the buyer gets the keys to his new house. This is a time period that is sometimes called closing. These steps must take place in order for the buyer to become a homeowner. The Realtor has an obligation to keep the buyer informed of every step in this process. 
  The very first thing that occurs in the buying process is that once you and the seller sign a mutually acceptable purchase contract, your agent will collect your deposit or earnest check and deposit it into  an escrow account. This will initially open the escrow at the escrow company specified in the purchase agreement. 
   The escrow company will act as a neutral third party and will collect the required funds and all the documents involved in the escrow process. The initial earnest money will be collected as will the loan documents and even the signed deed. When this step takes place an attorney may get involved to handle this step which may be called 'settlement' rather than escrow. 
   The bank  or financial institution who is financing the purchase will then get involved and will order an appraisal which the buyer usually pays for and this is done to protect the lender and it’s financial interest in case it needs to foreclose on the property. There may be a situation whereby the appraisal comes in lower than the offered price. If this happens the lender may not give the buyer financing unless the buyer comes up with cash for the difference of the lower appraisal or the seller lowers the price. Sometimes a negotiation takes place and the buyer and seller may meet in the middle and the price is lowered and the buyer comes up with a little more cash. 
There are other things that the realtor can do and those options are:
  • to provide additional information on why you believe the home should be appraised at a higher amount 
  • to get a second appraisal 
  • to try going with another lender and hope that lender's appraisal comes out in your favor 
If none of these options are possible, and the negotiation falls through you will be able to cancel the purchase contract. 
   The Realtor will not work with anyone who has not been pre-approved for a mortgage and this should be apparent at the time of purchase. Once the property is chosen by the buyer the lender will give you a "good faith estimate" which is a statement detailing the amount of the loan, interest rate, closing costs, and other costs associated with the purchase. Before signing this document make sure you have negotiated all the costs so that you are satisfied with the figures presented. Once this written loan agreement is signed, it's time to remove the financing contingency in writing. 
   After this step, the disclosure documents must be written and approved with a signature. These documents are written notifications of any obvious problems with the property that have been identified by the seller and his agent. One example would be a garage that has been turned into living space without permit and in violation of city codes. Most of these problems may have already been verbally disclosed early on in the buying process or maybe even mentioned in the listing. 
   During the escrow process all the necessary inspections need to get done. One of the most important is the home inspection which is not required but your realtor should emphasize it's importance and will only cost the buyer a  few hundred dollars. A professional home inspector will inspect the home and report any and all dangerous and costly defects in the home. At this point you can either back out of the deal or have the seller fix the defects. If the seller refuses you may ask the seller to reduce the price and the buyer will fix them. If the contract states you will purchase the property "as is", there is no negotiation. If the inspection process concludes in a satisfactory manner than the inspection contingency must be removed. 
   It is a good idea to do a pest inspection even if the lender doesn't require it but most lenders want to protect their interest in the property and will order one. The pest inspection is done to makes sure that there are no termites, carpenter ants, or other pests such as roaches or rats. Because the pest problems usually aren’t apparent during daylight hours and you don't want to  have a big unwelcome surprise once you move in. These problems need attention and resolution before you move in. Paying for this work can also be negotiated between both parties if it is not in the contract. 
   Other inspections may be recommended like the environmental inspection to check for toxins in and around the home. There could be a soils report or geologic report, if the home is near a landfill or a chemical plant, oil field or gas station. A land survey may be required if there are any boundary issues. Some of these problems uncovered after the sale can be prohibitively expensive to fix. If the home is in a flood zone it may require a flood report. If in a flood zone, flood insurance is required because you can't get homeowners insurance without it. Without homeowners insurance you can't get a mortgage and it would add an extra expense to the price. The flood insurance requirement is usually known to the buyers agent before he shows the home.  
   Hazard insurance is a requirement and includes homeowners insurance and extra coverage in your geological area like flood insurance. Homeowners insurance is a requirement and for the length of the loan. You will be able to choose your own insurance company so you can shop around for the best price or maybe bundle it with you car insurance for a better deal. 
   Also during the escrow period the title report and title insurance are requirements. The title report insures that title to the property is clear and there are no liens and the seller is the only responsible party. These title anomalies have to be cleared before the sale and the title insurance protects the buyer from any legal challenges that could have been missed in the title search. 
   The final walk-through is done just before closing just to make sure that no new damage has occurred after the home inspection. It is also done to make sure that items that were negotiated with the seller to leave with the purchase are still there such as appliances or fixtures. Unless serious damage to the property has occurred backing out is not an option but sometimes the agent is pressured to scuttle the deal for something insignificant because of buyer remorse. 
   One day before closing, a HUD-1 form will be issued which is the final statement of loan terms and closing costs. This HUD-1 statement should be compared to the good faith estimate by the buyer to make sure there are no unexpected or excessive fees or just outright mistakes. 
   The closing process can vary from state to state but the buyer will need to sign a boatload of documents which he should read carefully and they should be explained by the escrow officer. The seller will also have papers to sign. After the signing of all the paperwork, the escrow office will prepare the deed naming the buyer or buyers as the property owners and send it to the county recorder. The buyer will also have a cashier's check for the down payment and closing costs and the loan funds will be wired to escrow so that both the seller and the sellers agent can be paid. 
   Then finally the keys are in your hot little hands and you are a homeowner. The Realtor is the primary person responsible to make sure the escrow process is explained to the buyer and every step is followed through to the end. That is why it is always a good idea to understand the complete escrow process and why it takes at least thirty days on the average, although there is no time limit and it all depends on the sale.

No comments:

Post a Comment