Closing the deal

What Is Escrow?

It is customary and prudent for a buyer and seller to have a third, disinterested party to assist them in carrying out the terms of their agreement. In California, this procedure is known as an escrow. When opening an escrow, the buyer and seller establish terms and conditions for the transfer of ownership of property. Your escrow is created shortly after you execute the contract to purchase your home. The escrow becomes the depository for all monies, instructions and documents. The Escrow Officer has the responsibility of seeing that all terms of the escrow are carried out.

NOTE: In some states, the process of completing the purchase of a home is known as the "Settlement" process. Often the seller and buyer will come together at the Settlement table where documents are signed and exchanged. There may be a settlement attorney who facilitates this process. In California, the term "Escrow" is used to describe the process of completing the sale of property.

How does the escrow process work?

The escrow holds all monies, instructions and documents for the purchase of your home, including your down payment funds and your lender’s funds and documents for the new loan. The escrow officer takes instructions based on the terms of your purchase agreement and your lender’s requirements. The escrow officer can hold inspection reports and bills for work performed as required by your purchase agreement. Other elements of the escrow include hazard insurance, title insurance and the grant deed from the seller to you. Escrow cannot be completed until the instructions (requirements) have been satisfied, and all parties have signed escrow documents.

The escrow holder’s duties include:

Serve as the neutral agent and the liaison between all parties involved.

Prepare the escrow instructions.

Request a Preliminary Title Search to determine the status of title to the property.

Comply with the lender’s requirements as specified on its instructions to escrow.

Receive and handle purchase funds from the buyer.

Prepare or secure the deed and documents related to the escrow.

Prorate taxes, interest, insurance and rents.

Secure releases of all contingencies or other conditions imposed on the escrow.

Record the deed and any other documents.

Request title insurance policy.

Close the escrow pursuant to instructions supplied by the seller, buyer and lender, if any.

Disburse funds as authorized by the instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs.

Prepare final statements for all parties involved that account for the disposition of all funds held in the escrow account.

How do I open an escrow?

Your real estate agent will open the escrow for you. As soon as you execute your purchase agreement, your deposit is given to the title company for deposit into the escrow account. How will you know where your money has gone? Written evidence of your deposit generally is included in your copy of your purchase contract. Your funds will then be deposited in your separate escrow or trust account and processed through your local bank.

Escrow Instructions

Escrow instructions define all the conditions that must occur before the transaction can be finalized. Your escrow instructions specify, in a debit and credit format, the disposition of your purchase funds. They also provide for title protection for your home.

What information will I have to provide?

You may be asked to complete a statement of identity. Because many people have the same name, the statement of identity is used to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is kept confidential.

How long is the escrow?

The length of an escrow is determined by the terms of the purchase agreement and can range from a few days to several months. On average, it takes 30 to 45 days.

Your Responsibilities

Your role during the escrow process should be an active one. Don’t wait for the seller to volunteer information – stay on top of it yourself and take reasonable care, along with me, your agent, to protect yourself.

For example, when you review the Transfer and Disclosure Statement, TDS, keep an eye out for questions answered "unknown" or left unanswered. Ask about them until you are satisfied with the answers.

Let's talk about your specific concerns or plans for the property. Concerned about the open parcel behind the house? Ask about it!

You may also wish to investigate the following non-physical conditions, including:

Governmental zoning, requirements and limitations

Governmental permits, inspections or certificates

Limitations, restrictions and requirements affecting use of the property

Rent and occupancy control

Schools

Proximity and adequacy of law enforcement, crime statistics, proximity of registered sex offenders (see section on Megan’s Law) and other criminals

Proximity to fire, police and other services

Proximity to commercial, industry or agricultural activities

Existing and proposed transportation, construction and development, which may affect noise, view or traffic, airport noise, or odor

Wild and domestic animals, other nuisances, hazards or circumstances

For Further Protection – Home Warranties: Home warranties have become a more popular option on homes for sale. For protection, you may wish to have a home warranty that either you or the seller pays for. (It’s negotiable.) Warranties range in price from $300 - $600 and, for a fixed rate, generally cover limited aspects including plumbing, electrical, pest control and a host of other related areas. If you have a problem, generally you’ll pay $35-$50 to have a professional come out inspect and fix problems that are covered. Warranty agents typically are on hand 24 hours a day, 7 days a week to take your calls in emergencies.

Buyer Disclosures 101

During the escrow process, you will be informed of specialized conditions that affect the home you wish to purchase. They may include the following:

Lead Paint

Sellers of properties built prior to 1978 have the following obligations to you:

Give you a HUD pamphlet entitled "Protect Your Family From Lead in Your Home"

Disclose all known lead-based paint and related hazards and provide you with any available reports

Include a standardized warning as an attachment to the contract

Complete and sign statements verifying that requirements have been met

Retain the signed acknowledgement for 3 years

In addition, sellers must give you a 10-day opportunity to test for lead

Natural Hazards

California law requires sellers to disclose to you, via a "Natural Hazard Disclosure Statement" or NHD, if properties are located in one of six predetermined "natural hazard" zones. (If the property is not within one of these zones, sellers, of course, have no such obligation.)

The six zones are:

A flood hazard zone as designated by the Federal Emergency Management Agency (FEMA)

An area of potential flooding after a dam failure (also known as an inundation area)

A very high fire hazard zone

A wildland fire area, also known as a state fire responsibility area

An earthquake fault zone

A seismic hazard zone

If an NHD is delivered to you after you signed the Purchase Agreement, you will have three days to rescind the agreement. However, if you receive the NHD before you signed the Purchase Agreement then you cannot use the NHD to rescind.

Mello-Roos Districts

Especially (but not exclusively) if you are buying a home in a newer area, you may be locating into a Mello-Roos tax district, and the seller must provide to you a "Notice of Special Tax" to let you know. If this notice is delivered to you in person, you have three days to rescind your offer. If it’s delivered via U.S. mail, you have five days to decide.

Basically, a "Mello-Roos Community Facilities District" is formed by a local government, district, or agency to finance public services and facilities including police and fire departments, ambulance and paramedic services, parks, schools, libraries, museums and cultural facilities. Condominiums etc.

If you’re buying a condominium, townhouse or other planned development (for purposes of this discussion, we will call them all "condominiums"), there are things you need to know about common areas (such as greenbelts and recreational rooms) and the homeowner’s association.

You will be required to make monthly payments, known as regular assessments, to maintain common areas, as well as special assessments to replace a roof or repair the plumbing, as determined by the homeowner’s association (HOA.)

Condominiums also may have regulations regarding architectural requirements, limitations on pets, and age restrictions (i.e., senior housing). These must be formally disclosed to you during escrow. You may receive this information via the following documents, to the extent that they exist and are available:

Declaration of Restrictions: Commonly known as "CC&Rs", or Conditions, Covenants and Restrictions

Articles of Incorporation or Articles of Association Bylaws

All current financial information and related statements, including operating budget, estimated revenue and expenses, HOA reserves, estimated remaining life of major components (including roofs, plumbing etc.), and regular and special assessments

A statement describing the HOA’s policies and practices in enforcing lien rights or other legal remedies for default in payment of its assessments

A summary of the HOA’s property, general liability, and earthquake and flood insurance policies

On existing HOA’s, a statement describing any restrictions on the basis of age, such as authorized senior citizen housing

Many smaller HOAs will not have all of these documents, but must provide what they do have. We recommend that you review these documents thoroughly, because they will affect you firsthand.

Megan’s Law.

If a registered sex offender lives in the neighborhood in which you want to locate, you have the right to investigate – this is made possible due to a 1996 statute known as "Megan’s Law." (Note that the seller does not have an obligation to provide this information to you.)

To investigate, you may:

Log on to: http://caag.state.ca.us/megan/index.htm

Call (900) 448-3000 to access the California Sex Offender Information Database. (There may be a charge to check names by telephone.)

Call your local police department to locate a CD-ROM records viewing station.

The Loan Process

Step 1. The Application

The key to the loan process going smoothly is the initial application interview. At this time the loan officer obtains all pertinent information and documentation so unnecessary problems and delays may be avoided. This is the best time to discuss loan programs best suited to meet the homebuyer’s needs.

Step 2. Automated Underwriting

After the application is completed, the loan officer inputs the application into the automatic underwriting system. This is an automated financial evaluation program that analyzes the data from the loan application of the borrower, such as income, credit history, debts, property details, debt-to-income rations, etc. This process evaluates the borrower’s financial picture and makes a credit decision. In conjunction with this review, the loan officer requests a credit report run on the borrower(s).

Step 3. Requesting Documentation

The next step after receiving the initial lending decision is that the loan officer will request certain documents such as bank statements, W2's (2 years), verification of funds, landlord details and any other supporting documentation that has been requested.

Step 4. The Homebuyer Goes into Contract on a Property

Step 5. Loan Submission

Once all of the necessary documentation has been acquired, the loan officer puts the loan package together and submits it to the underwriter for final approval. The final loan package includes the contract on the property, the property appraisal, preliminary title reports and any conditions that were identified in the automated underwriting process. The loan officer submits the final loan package to the underwriter for formal loan approval.

Step 6. Loan Approval

The underwriter reviews the contract, property appraisal and preliminary title reports and validates the conditions from the automated underwriting process. File disposition is achieved. Assuming all criteria are met, the loan is approved and/or other conditions may be requested as terms of funding.

Step 7. Rate Lock

The loan officer will discuss the loan programs available to the homebuyer(s) in conjunction with discussing the final loan approval and conditions. Based on the outcome of the property purchase and final loan approval process, the buyer may wish to or need to review other loan programs. A final loan program decision is reached and the request for rate lock is made.

Step 8. Documents Are Drawn

After the loan approval, the loan documents (including the note and deed of trust) are completed and sent to the title company. The escrow officer calls the borrowers to come in when the papers are ready for final signature. At this time, the borrowers are told how much money they will need to bring in to close the loan.

Step 9. Funding

Once all the parties have signed the loan documents, they are returned to the lender, who reviews the package. If all of the forms have been properly executed, the funds are then transferred. At closing, the borrower must present a cashier’s check or arrange for a wire transfer of funds directly to the title company for the required closing costs and payments. No personal checks are accepted. Also, funding conditions must be submitted and satisfactorily met at this time.

Step 10. Recordation

When the title company receives the funding check from the lender, the title company makes the lender’s security for the loan a matter of public record. This is done by recording both the note and deed of trust at the County Recorder’s office. Escrow is now officially closed.

Who Pays For What?

A major question in every escrow is: "Who pays what?" The answers vary by county ordinances and standard practices.  What is listed below are "customary" practices.  All fees charged are governed by terms of the sales contract and other written escrow instructions. Note: on some FHA, VA or other government-backed loans, the buyer will pay some fees that governmental regulations will not allow you to pay.

Sellers Generally Pay:

Real estate commission

Document transfer tax ($1.10 per $1,000 of sales price)

Notary fees

Property tax proration (to date of acquisition)

Special delivery/courier fees, if required

Document preparation fees

Document recording charges

Homeowner’s association statement fee and prorata dues

Home warranty (according to contract)

Work/repairs required (according to contract)

Matters of record against the property or seller (loans, tax liens, judgments, etc.) and fees required to clear them (statement fees, reconveyance/trustee fees and prepayment penalties)

Bonds and assessments (according to contract)

Buyers Generally Pay:

Title insurance policy premiums (lender’s and Buyer's)

Escrow fees

Notary fees

Property tax proration (from acquisition date)

Special delivery/courier fees, if required

Document preparation fees

Document recording charges

Homeowner’s association transfer fee and prorata dues

City costs

Home warranty (according to contract)

Inspection fees (according to contract)

Matters of record against the buyer including tax liens, judgments and fees required to clear them

Fire insurance premium for the first year

Assumption/change of records fees if the buyer is taking over an existing loan

Lender’s new loan charges

Interest on new loan from date of funding to 30 days prior to the first payment

Other prorations (rents, insurance etc.) if applicable