Escrow Process

Buying Your First Home in Phoenix, Arizona
Part 6 – Making Sense of Escrow

Escrow Explained

Escrow, escrow, escrow. We see this word and hear it all the time in connection with real estate transactions, Buying your first home in Phoenix, Arizona but what does it mean?! The best and simplest definition of “escrow” I’ve seen comes from InvestorWords.com:

Documents, real estate, money, or securities deposited with a neutral third party (the escrow agent) to be delivered upon fulfillment of certain conditions, as established in a written agreement; an account held by the lender into which a homeowner pays money for taxes and insurance.

The process of collecting all of those documents, real estate, money and securities can be a bit complicated – and you should not stress about it. However, as a first-time buyer, you do want to have the basic knowledge of the process.

Here are the highlights, in something of a time line fashion:

The escrow officer orders a copy of the existing deed to determine the legal description of the property and the names of the owners of record.
The escrow officer orders a title insurance commitment in order to determine the requirements to close the transaction and informs the buyer and the lender what will remain on record against the property after closing.
The escrow officer orders statements from the seller’s current lender and the HOA to determine the balance to be paid off or transferred at the close of escrow.
The escrow officer forwards copies of the title insurance commitment, covenants, conditions and restrictions, and termite inspection reports to the buyer, seller, lender, and/or their agents for approval.
The escrow officer, upon receiving the buyer’s loan documents from the lender, prepares the settlement statement. The buyer and seller sign separately.
The buyer deposits the closing funds at the scheduled signing time unless other arrangements have been made.
After signing, the loan documents are returned to the lender for approval and funding.
Upon receipt of the loan funds from the lender, the escrow office records the transaction documents with the County Recorder on the agreed-upon recording date.
Following the recording, the funds are disbursed and copies of all documents are provided to the real estate agents, buyer, and seller.
The title insurance policies are then issued to the buyer and the lender.

Earnest Money

Once you have made an offer on the home you want to purchase, you make a deposit of “earnest money,” in part to show the seller you are serious about buying their house. Your Realtor will let you know the amount that is usually offered in your area – but the money doesn’t go to the seller. A third party holds the agreed-upon amount in a special trust or escrow account until after the sale has closed or the contract has been broken.

If the sale goes through, the earnest money is applied to your down payment or other closing costs, depending on the specifics of your contract. If for any reason you do not wind up purchasing the home, the seller has the right to keep the money. You can, however, get your money back, up to the point when you are notified that the seller has accepted your offer. Should the seller fail to meet their obligations, you keep your money.

Researching a Clear Title

The property’s title defines the right of ownership to said property. A title is said to be clear if there are no substantial liens or claims (e.g., a mortgage) against it. A standard mortgage contract in which way you want the seller to prove to you that they own the property, and that there are no claims against it that would prevent it from being transferred to you.

At this point, the escrow officer performs a title search and issues an “Owner’s Policy of Title Insurance.” This insurance protects you against losses through claims against the title. Since you are insured (usually for the sales price of the property), the owner’s insurance provides adequate protection. Additionally, a title report is prepared that shows a brief history of the ownership of the property and any legal documents that may affect the title.

OVERVIEW OF THE ESCROW HOLDER’S DUTIES

Open the escrow account.
Request a “title commitment” to determine the title status of the property.
Comply with the lender’s requirements, as spelled out in their escrow instructions.
Receive and handle purchase funds from the buyer.
Secure or prepare the deed and other documents related to the escrow account.
Prorate the taxes, interest, insurance, and rental payments.
Acquire releases containing any contingencies, exceptions, or conditions imposed on the escrow account.
File the deed and other documents.
Request the title insurance policy.
Close the escrow account, according to any such instructions provided by the seller, buyer, or lender.
Disburse funds as authorized by the written instructions, including fees for the title insurance, recording fees, real estate commissions, and loan payoffs.
Prepare final statements for all parties accounting for the dispersal of all funds held in the escrow account.