All About Escrow

What Is Escrow?

The word “escrow” is derived from the French word, ‘escroue’ meaning a scroll or roll of writing.

Escrow can be considered a period of time as well as a place.

It is the period of time that begins when an offer to purchase real property is accepted by all parties, and ends when title is transferred into the name of the new owner. During this period of time, called the escrow period, many different actions are taken in preparation for transfer of title, such as obtaining new financing and insurance, and obtaining information to discharge the existing liens such as mortgage and property taxes. This is also usually the period of time when the buyer inspects the property, and reviews and approves disclosure information about the condition of the property.

Escrow is also a particular place; a neutral holding ground for monies and documents associated with the transaction. The escrow service is provided by an escrow company (in this area escrow and title services are housed in the same place, called the title company).

Escrow can also be considered as the depositing of funds and documents by the parties with an impartial third party pending completion of the terms of the escrow instructions.

When the parties deliver documents and money to the impartial Escrow Officer to be held for further delivery until certain conditions have been met, we say the documents are held “in escrow”. We may also say the parties have “opened an escrow”.

Each of the principals of the escrow (seller’s agent, buyer’s agent, lender) will give to the Escrow Officer written instructions setting out the conditions under which title may transfer to the new owner. The Escrow Officer may only act on those instructions which are consistent with all principals.

The Purpose of an Escrow

The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as:

  1. Custodian for funds and documents
  2. A clearing house for payment of all demands
  3. An agency to perform the clerical details for the settlement of the accounts between the parties.

Typical Escrow Transaction

Typically, an escrow begins with the customer (buyer’s agent) “opening the order for title work”. In other words, giving the escrow company the necessary information regarding the transaction and requesting that it prepare a title report. There are two basic types of title reports: a preliminary report and a commitment. A preliminary report provides the customer with an analysis of the present status of the property as revealed by the public records filed or recorded in the county in which the property is located. A commitment (issued in some jurisdictions) additionally specifies the requirements which must be met in order to issue the requested insurance.

Upon receipt of the preliminary report, an analysis is made to determine the necessary action and documents required to complete the transaction: demands for satisfaction of liens not acceptable to buyer and/or lender; documents for recording; instructions and requirements of the new lender. In most areas, buyers and sellers instructions are prepared for signature from the information gathered. When all the title and financial requirements are met and instructions from all parties can be fully complied with, the escrow can close. Then the financial settlement takes place, the new deed is recorded and the title insurance policies are issued.

The Life of An Escrow

Below is a summary of actions taken by respective parties in an escrow, from the point of view of the escrow company:

The Buyer

Submits a written offer to purchase (or accepts the Seller’s counter-offer) accompanied by a good faith deposit amount.

Fulfills contractual contingencies, such as inspecting the property.

Applies for a new loan, completing all required forms and often prepaying certain fees such as credit report and appraisal costs.

Approves the preliminary report, any property disclosure, and inspection reports called for by the purchase agreement.

Approves and signs the escrow instructions, new loan documents and other related instruments, required to complete the transaction.

Fulfills any remaining conditions specified in the contract, lender’s instructions and/or the escrow instructions.

Approves any final changes by singing amendments to the escrow instructions or contract.

Deposits sufficient funds in the escrow to pay the remaining down payment and closing costs.

The Lender

Accepts the new loan application and other related documents from the Buyer and begins the qualification process.

Orders and reviews the property appraisal, credit report, verification of employment, verification of deposit, preliminary report and other related information.

Submits the entire package to the loan committee and/or underwriters for approval. When approved, loan conditions and title insurance requirements are established.

Informs Buyer of loan approval terms and commitment expiration date and provides a good faith estimate of the closing costs.

Deposits the new loan documents and instructions with the escrow holder for Buyer’s approval and signature.

The Escrow Officer

Reviews and approves the executed loan package and coordinates the loan funding with the escrow officer.

Receives an order from the agent for title and escrow services.

Orders the title search and examination on subject property.

Acts as the impartial “stakeholder” or depository, in a fiduciary capacity, for all documents and monies required to complete the transaction per written instructions of the principals.

With authorization from the real estate agent or principal, orders demands on existing deeds of trust and liens or judgments, if any. For an assumption or subject to loan, orders the beneficiary’s statement or formal assumption package.

Reviews documents received in the escrow: preliminary report, payoff or assumption statements, new loan package and other related instruments. Reviews the conditions in the lender’s instructions including the hazard and title insurance requirements.

Prepares the escrow instructions and required documents together with a preliminary estimate of settlement charges, for the Buyer and Seller, in accordance with the terms of the sale.

Presents the instructions, documents, statements, loan package (s) and other related documents to the principal (s), for approval and signature.

Reviews and approves the executed loan package and coordinates the loan funding with the escrow officer.

Reviews, the signed instructions and documents, returns the loan package, and requests the lender’s funds.

Reviews the balance of funds required from the Buyer and/or proceeds of the loan from the lender.

Determines when the transaction will be in the position to close and advises the parties.

Assisted by title personnel, records the deed, deed of trust and other documents required to complete the transaction with the County Recorder and orders the title insurance policies.

Closes the escrow by preparing the final settlement statements disbursing the proceeds to the Seller, paying off the existing encumbrances and other obligations. Delivers the appropriate statements, funds and remaining documents to the principals, agents and/or the lenders.

The Seller

Accepts Buyer’s offer to purchase and initial good faith deposit to open escrow.

Submits documents and information to the escrow holder, such as: addresses of lien holders, tax receipts, equipment warranties, home warranty contracts, any leases and/or rental agreements, etc.

Orders inspections, receives clearances and approves final reports and/or repairs to the property as required by the terms of the purchase agreement.

Approves and signs the escrow instructions, payoff demands, grant deed and other related documents required to complete the transactions.

Approves any final changes by signing amendments to the escrow instructions or contracts.

The Title Company

Examines the title to the real property and issues a preliminary report.

Determines the requirements and documents needed to complete the transaction and advises the escrow officer and/or agents.

When authorized by the escrow officer, records the signed documents with the County Recorder’s office and prepares to issue the title insurance policies.

Closing Costs