Escrow
If this is your first time buying a home, you are probably amazed by the large sums of money being tossed around and negotiated over. Before, this gets too overwhelming, you should now the basics of escrow, so you know just what you are in for.
Both you and the seller of the home that you are interested in should have the assurance that your money is being well looked after and that while you are in the bargaining process your investment is being looked after.
After all, you are not just investing money, but also your time, which for many of us is just as valuable.
The best way to ensure that everybody in the process is getting a fair shake, is that any money being put up as a deposit or Earnest Money, is being given to a neutral third party who will ensure that no property changes hands before both parties are completely satisfied with all elements of any contract. This third party is called escrow.
Once everyone is in agreement the money and the documents are distributed, as per the terms of the contract.
You can be sure that you are getting a fair shake, because the escrow is a party that works independently for both the buyer and the seller. Therefore, no one party can walk away felling 'ripped off'.
Functions of the Escrow:
Receives and deposits (into escrow's account) buyers initial deposit and prepares escrow package. Requests "demands" (pay-off statements) from existing lenders and/or lien holders. Obtains sellers notarized signature on grant deed. Safeguards grant deed until all terms and conditions are met and buyer's remaining certified funds are on deposit. Orders title search and receives and distributes preliminary title report. Calculates prorations pertaining to property taxes, rents, insurance, interest, and other expenses as required. Coordinates with buyers lender throughout the escrow process. Orders and processes buyers loan documents. Coordinates buyer's signing of loan documents and their return to buyer's lender. Receives buyers final down payment funds and coordinates funding with buyers lender. Orders recordation of grant deed conveying title to buyer and distributes all funds: pays-off existing loans; pays other required costs, such as termite completion, home protection policy; etc. Releases net proceeds to seller.
AS this is all going on, you as the buyer are in the negotiation phase with whichever lender you have determined will give you the best rate on your mortgage. This entire process is independent of your escrow. Your lender is working for you. Not the seller.
Although, there may be some collaborating between all three parties if there is a problem or a situation that can be financially beneficial for all.
The Lenders Functions:
Orders a credit report and other credit documentation as required (mortgage ratings, landlord ratings). Reviews the buyers credit and when necessary obtains satisfactory explanations from the buyer regarding any negative credit history. Verifies the buyers sources of income. Verifies that the buyer has adequate liquid funds for down payment, closing costs, and reserves. Requests an appraisal of the property, and verifies that the propertys value is equal to the contract sales price. Submits the loan to underwriters for final approval. Coordinates delivery of the buyers loan documents to the escrow officer.
As these three parties are all working together to get your loan approved as fast as possible, the seller isn't just sitting on their hands. They must take action to ensure that the sale can go through properly on their end.
Seller's Functions:
The seller and the listing agent must now prepare detailed disclosures that are required by law (smoke detector, lead based paint, earthquake, environmental hazards, zone disclosures, water heater, transfer disclosure, etc.) Provide escrow officer information on existing loans to check against title search findings. With their Realtor, make the home available for physical inspection and other trades people as required by the purchase contract, such as licensed Termite Company and lenders appraiser. Make any repairs agreed upon in purchase contract.
While these things may seem independent of each other, they all must occur in a timely fashion. Much like pieces of a puzzle you need to take things one step at a time to ensure that the next step can proceed smoothly.
If you are still unsure about what escrow exactly is, I'll use a fairly modern-day example. If you were to buy a product on ebay, you can opt to use a service called PayPal. Escrow is a lot like PayPal for real estate. The service, essential assures that when you are in the process of a monetary transaction, both parties are guaranteed to receive the money in question.
But what if you do not want to put your money in escrow?
Naturally, you are not obligated to do so. Some lender may allow you to do so if your loan-to-value rate is especially high. It should be at least 80% (which is rare) But, bear in mind that they might try and boost your interest rate to compensate for the additional risk that they are taking.
Is canceling escrow a good idea?
Once you have an escrow arrangement in place, it is very difficult to get out of it. You would have to convince your lender of this, which is very hard. In most cases you're just going to have to live with it.
