You are pre-approved, you found your home, and your offer was accepted, now the escrow process takes place. Typically, it takes 30 to 45 days to close on a house, depending on a few factors like how fast it takes to get a home inspection and remove contingencies.
Paperwork is critical to closing a property deal. Despite there being a stack of papers filled with complex legal terms and jargon, you should read all of it yourself. If you don’t understand something, consult a real estate attorney. Your agent will also be helpful in making sense of any complex legal language.
THE ESCROW PROCESS
The term “escrow” refers to the time frame and events between contract and closing. It starts when you sign a purchase contract with the seller and ends when you close on the house. Typically, during the escrow process a waterfall of tasks happen including the home appraisal, home inspection, mortgage underwriting, title search, purchase homeowner’s insurance and document preparation. Before any escrow can close, all the terms and conditions of the purchase contract must be met; then the seller deposits the deed, and the buyer deposits the funds.
TITLE INSURANCE
The “title” is a legal term that refers to ownership. When you have the title to something, you own it. As part of the escrow process. A title search and title insurance provide peace of mind and a legal safeguard. They ensure that when you buy a property, no one else can try to claim it later. A title search is an examination of public records to determine and confirm a property’s legal ownership and find out what claims, if any, exist on the property. If there are any claims, they may need to be resolved before the buyer gets the property.
HOME INSPECTION
A home inspection is a visual, non-invasive examination of a home’s structure and its interior and exterior features and systems. The purpose of the inspection is to identify potential issues that need immediate or near-future repair, health and safety issues, and security issues. At the end of the inspection, the home buyer will understand the home’s condition. If you find a serious problem with the home during the inspection, you’ll have an opportunity to back out of the deal or ask the seller to fix it, or you can also have the seller pay you to fix it.
HOME APPRAISAL
For a lender to fund your new purchase, refinance, or home equity loan, it will require an appraisal to assist in determining the value of your property as collateral against the loan. Your lender will typically order the appraisal, and you will pay the cost of the appraisal as part of the financing process. Because the lender uses an appraisal to determine the relationship between the property’s fair market value and amount of the loan that you might be approved for, an appraisal that is inaccurate can affect the amount of equity available to you or how much you might pay for a property.
Once the appraisal has been completed, a lender is required to provide you with a copy of the appraisal as soon as reasonably possible, but no later than three days prior to closing. Therefore, if you receive an appraisal that you suspect has inaccuracies that impact the resulting value, some initial work on your part may help to expedite a secondary review of the valuation and assist in closing on time.
PEST INSPECTION
A pest inspection is separate from a home inspection. It involves a specialist ensuring that your home does not have any wood-destroying insects, such as termites or carpenter ants. Pests can be devastating for properties made primarily of wooden material.
HOMEOWNERS INSURANCE
Often overlooked in the long list of things to do before buying and moving into your new home is buying homeowners insurance. In most cases, lenders mandate buying homeowners insurance before the loan closes and maintaining coverage for the life of the loan. By securing the coverage you need before you even move into your new home, you safeguard your purchase from disaster for yourself and the lender. It’s important to research various insurance policy options as they may offer different levels of coverage. And different homes may have different coverage needs.
HOME WARRANTY
A home warranty covers service and repair or replacement of your home’s major systems and appliances, generally for a one-year term. This type of warranty is issued by a home warranty company and is different from a standard homeowners’ insurance, which insures a home’s structure and belongings in case of a “known peril” listed in the contract, such as weather events, fires, or floods. Despite being different, home warranties and homeowners’ insurance policies are both important tools that can reduce the risk and potentially the financial burden of owning a home. But you need to understand the differences between them.
CONTRACTUAL CONTINGENCIES
Your real estate offer should be contingent upon the following five things:
• Obtaining financing at an interest rate does not exceed what you can afford.
• The home inspection did not reveal any significant problems with the home.
• The seller fully discloses any known issues with the home.
• The pest inspection does not show any major infestations or damage to the home.
• The seller completes any agreed-upon repairs.
Such contingencies must be removed in writing by specific dates stated in your purchase offer, a process known as active approval. However, in some purchase agreements, contingencies are subject to passive approval (also known as constructive approval). That means they are considered approved if you don’t protest them by their specified deadlines. Buyers must understand the approval process and take the necessary actions by the required date.
DOCUMENT PREPARATION
The mortgage lender produces a variety of documents relating to the home loan and delivers them to the escrow agent or company. The escrow agent will check these “loan docs” and other related paperwork to ensure that everything is complete and ready for closing. They will also tally up the buyers’ and sellers’ closing costs. A few days before closing, the buyer will receive a disclosure document that shows the amount due at closing.
FINAL WALK-THROUGH
One of the last steps before you sign your closing papers should be to look over the property one last time. A final walk-through is an opportunity for you, as the homebuyer, to visit and assess the property you’re purchasing before the closing.
Walk-Through Checklist Sample:
• Check that the seller’s belongings have been fully moved out. (Double check any storage unit space to verify that these are also empty.)
• Any repairs that the seller promised would be done have been completed.
• All appliances that the purchase agreement specified would remain are in proper working order.
• The seller left copies of all manuals and instructions for appliances and fixtures.
• Door and window locks are fully functioning.
• The HVAC systems (furnace, air conditioning, etc.) are working properly.
• All walls, ceilings and doorways are structurally intact and not damaged from moving.
• The yard is free of any debris or damage.
• The seller left the garage door openers and keys in the home or with their agent.
The goal of the visit is to ensure the home is in the same condition it was when you agreed to buy it.
CLOSING
This is the final step in the escrow process, and the most important. At this stage, the homebuyer will provide a check or have the money wired for the closing costs that are due. The homebuyer and seller will sign a variety of documents relating to the sale. The title or escrow company will update the status of the title to reflect the transfer of ownership. Mortgage documents will be returned to the lender after they have been signed, and shortly after that, the lender will release the funds.
In some areas of the country, real estate settlement is completed at what is known as a “table closing.” A table closing involves a number of people. Typically, the buyer and seller attend the closing along with their real estate agents. A real estate attorney, settlement agent or title agent may conduct the closing.
Congratulations, you are now a homeowner!
