What Exactly Happens When a House is in ‘Escrow’?

You’ve found the perfect home, put in an offer, and the seller accepted. Congrats! But the deal isn’t quite done yet.

There’s this little thing called ‘escrow’, and it involves a bunch of contingencies that need to be met before you get the keys to your new home.

So, what exactly is ‘escrow’, and what’s involved in the process?

Mortgage Financing

After the offer on the home has been mutually accepted by both you and the seller, and all the terms and conditions of the contract have been agreed upon, the escrow process can start. And one of the more pertinent steps during escrow is for you to secure mortgage financing.

If you were pro-active, you would have already gotten a pre-approval letter from your lender before you even started looking for a home. While a pre-approval doesn’t exactly guarantee that you’ll be approved at the time that your offer on a home is accepted, at least it gets the ball rolling and keeps your lender briefed on your home-buying intentions.

After you’ve given the mortgage lender the address of the property that you’ve accepted to purchase, a statement will be prepared that details your loan amount, interest rate, and any other costs involved. Should the lender approve a loan and provide you with written proof, you can remove the financing clause on the contract and continue on with the escrow process.

Property Insurance

Your lender will want to see proof that your home can be insured, and that the insurance process has already begun before a mortgage can be secured. You’ll need to get in touch with an insurance agent and discuss the type and amount of insurance that your specific property will need.

Lender Appraisal

The lender who is providing your mortgage will want to have the property appraised to make sure it’s actually worth what you agreed to pay for it. Lenders want to make sure their financial interests are protected at all times, and aren’t in the business of lending huge sums of money for properties that are worth a lot less than what buyers agree to pay for of them.

If the appraisal comes in at a price that’s lower than your offer price, mortgage financing will likely be declined, unless you can come up with more money to put towards the downpayment, or if the seller agrees to shave a few bucks off the price to match the appraised value.

Home Inspection

A home inspection should always be part of a purchase agreement, with very few exceptions. While the contract is in escrow, a licensed home inspector will check out the integrity of the property’s structure and finishes. Any problems that are identified will be itemized on a report, along with any suggestions on how to rectify them and the cost associated with doing so.

If any issues are identified, you have the option to renegotiate the price in order to cover the costs of making any repairs, or ask that the seller make the repairs prior to you taking possession. Of course, the seller can always decline, at which point you have the option to either go ahead with the sale anyway, or back out as a result of the home inspection not being satisfactory to you.

HOA Document Review

If you’ve purchased a property in a homeowner’s association, then the HOA documents will need to be reviewed by your lawyer. You could do it yourself, but these documents are lengthy and complex, so you’re better off leaving it to an attorney to review on your behalf.

Analyzing these documents will help identify if there are any potential problems with the HOA, such as pending lawsuits, limited reserve funds, problems with the building, and so on. If you’re not satisfied with what the HOA documents reveal, you can back out of the deal before final closing.

HUD-1 Settlement Sheet

As the closing date approaches, a HUD-1 Settlement Sheet will be prepares which lists all the debits and credits for the buyer and seller. For instance, if the seller owes any back taxes on the property, they’ll be considered as a debit to the seller, and listed on the HUD-1 sheet as such.

Final Walk-Through

If you’ve included a contingency in your contract that allows you a final inspection a couple of days before closing, then you have the opportunity to go back and make sure everything is the way it was when you agreed to buy the property.

The Bottom Line

As you can see, there’s a lot that goes on in escrow, which is why it can often take a while to complete before final closing. But don’t get too concerned about the complexities involved, since your real estate agent will be there to oversee the whole process.