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 holder’s duties include:
How do I open an escrow?
What information will I have to provide?
How long is the escrow?
The Sale Process
|While there’s no such thing as a typical homesale – each has a character and a flow of its own – there are certain aspects you can expect. While local real estate practices may vary, here are the basic activities that occur during the transaction, from receiving an offer to closing escrow.|
|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:
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:
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.
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:
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.
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
Step 3. Requesting Documentation
Step 4. The Homebuyer Goes into Contract on a Property
Step 5. Loan Submission
Step 6. Loan Approval
Step 7. Rate Lock
Step 8. Documents Are Drawn
Step 9. Funding
Step 10. Recordation
|Below are some of the costs you may incur. Some are one-time fees, while others recur over the life of the loan. When you first apply for your loan, you will receive a Good Faith Estimate of Settlement Charges and a booklet explaining these costs, to minimize surprises. Generally, you can expect closing costs to equal from 3 to 6 percent of your mortgage loan amount.
Credit Report Fee:
Document Preparation Fee:
Loan Origination Fee
Miscellaneous Title Charges
Private Mortgage Insurance (PMI) Premium:
Taxes and Hazard Insurance:
The “dwelling coverage” portion of your hazard insurance covers costs to completely rebuild your home, while the “liability coverage” protects you against accidents that occur on your property. “Personal Property Coverage” pays to replace your possessions and generally totals 50 to 75 percent of the dwelling coverage amount. Flood and earthquake insurance policies also are available and are recommended if you are in high-risk areas.
Title Insurance Fees
Closing Costs: The Good Faith Estimate
The Good Faith Estimate
This is a detailed summary of costs you may have to pay when you buy or refinance your home. They are listed in the order in which they should appear on a Good Faith Estimate you obtain from your mortgage lender. Elements of the Good Faith Estimate are: (Costs will apply differently to each homebuyer and are not particular in total to all homebuyers)
Non-Recurring Closing Costs Associated with the Lender:
Items Required to be Paid in Advance
Reserves Deposited with the Lender:
Refinancing Associated Costs
Closing Costs: An Explanation of Terms
Appraisal Fee: Since the property serves as collateral for the mortgage, lenders want to be reasonably certain of the value and they require an appraisal. The appraisal is used to determine if the price you are paying for the home is justified by recent sales of comparable properties. The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value. Unique and more expensive homes usually have a higher appraisal fee. Appraisal fees on VA loans are higher than on conventional loans.
Credit Report Fee: As part of the underwriting review, the mortgage lender will want to review the borrower’s credit history. The cost varies depending upon the type of report requested.
Lender’s Inspection Fee: This is generally associated with new construction and is associated with what is called a 442 inspection. Since the property is not finished when the initial appraisal is completed, the 442 inspection verifies that construction is complete with carpeting and flooring installed.
Mortgage Broker Fee: About seventy percent of loans are originated through mortgage brokers and sometimes the points associated with the loan are listed here instead of under Loan Origination Fee. They may also add in any broker processing fees in this area. The purpose is to clearly indicate how much is being charged by the wholesale lender and how much is charged by the broker. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying “extra” by going through a mortgage broker.
Tax Service Fee: During the life of the loan the borrower makes monthly property tax payments, either on one’s own or through an impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in the lender’s interest to pay an independent service to monitor property tax payments.
Flood Certification Fee: The lender must determine whether or not the property is located in a federally designated flood zone. This fee is usually charged by an independent service to make that determination.
Flood Monitoring: From time to time flood zones are re-mapped. Some lenders charge this fee to maintain monitoring on whether this re-mapping affects the property.
OTHER LENDER FEES:
Administration Fee: If an Administration fee is charged, then generally there will not be a fee for underwriting.
Appraisal Review Fee: Even though a borrower will probably not see this fee on a Good Faith Estimate, it is charged occasionally. Some lenders review appraisals as a quality control procedure and charge for the activity.
Warehousing Fee: This is rarely charged, however, some lenders have a warehouse line of credit and add this as a charge to the borrower.
ITEMS REQUIRED TO BE PAID IN ADVANCE:
VA Funding Fee: On VA loans, the Veteran’s Administration charges a fee for guaranteeing the loan. Based upon the use of the borrower’s VA eligibility, the fee is either two or three percent of the loan balance. Instead of paying for this as an expense, commonly it is financed into the loan balance.
Up Front Mortgage Insurance Premium (UFMIP):U This is charged on FHA purchases of single family residences or Planned Unit Developments and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan.
Mortgage Insurance: Though rare, some first time homebuyer programs require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance is simply paid monthly along with the mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on the loan.
RESERVES DEPOSITED WITH THE LENDER:
Mortgage Insurance Impounds: When required, lenders allow this premium to be paid monthly. However, a borrower may be required to put two months’ worth of mortgage insurance payments as an initial deposit into the impound account.
NON-RECURRING CLOSING COSTS NOT ASSOCIATED WITH THE LENDER:
Notary Fees: Most loan documents have multiple sets that must be notarized.
Recording Fees: Certain documents are recorded with the local County Recorder’s Office.
Pest Inspection: This is also referred to as Termite Inspection. This inspection tests for pest infestations and other items such as wood rot and water damage. If repairs are required, the amount to cover those repairs is usually covered by the seller, but it is a negotiable item. Usually the pest inspection fee is paid by the seller and is not normally reflected on the Good Faith Estimate.
Home Inspection: Since it is the homebuyer’s choice to obtain a home inspection, this cost may not be reflected on the Good Faith Estimate. However, it is highly recommended.
Home Warranty: This is an optional item. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.
Homeowner’s Association Transfer Fee: When buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to the buyer.
REFINANCING ASSOCIATED COSTS:
Demand Fee: The existing lender may charge a fee for calculating payoff figures.
Sub-Escrow Fee: This fee is actually charged by the Title Company.
Loan Tie-In Fee: This fee is charged by the Escrow Company..
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:
Buyers Generally Pay:
The Escrow Process
|After all of the contingencies have been removed or satisfied, your loan has been finally approved and documents have been drawn, you are now ready to close the escrow. Here are some of the things that you should think about in advance of closing.
When do I sign escrow instructions and where do I do this?
What should I look out for during the final walk-through?
The Escrow Appointment
What’s the next step after I’ve completed my sign-off?
What is an “escrow closing?”
What do I get at closing?
What can I expect to happen on closing day?
When will I receive the deed?
After the close…
Your lender may retain this loan in its own portfolio or may sell the loan to either a private or public agency, such as the Federal National Mortgage Association (Fannie Mae). In either case, you will receive specific instructions as to how to make your loan payments.