The home buying process is relatively straightforward, but there are many moving parts that can be overwhelming if you don’t know what to expect. There are quite a few steps between having an offer accepted and moving into your new place — a period typically referred to as the escrow process. Escrow is important to understand because it solidifies the real estate transaction and directly impacts how soon you get the keys to your new home. Review the necessary steps to prepare for the escrow process timeline before you start looking at potential homes.
How Long Does The Escrow Process Take?
The escrow process takes approximately 30 days. The exact timeline will depend on a few factors, but most transactions are able to stick to this timeline. There are some scenarios where escrow can take up to 60 days, though this is usually the result of a problem during the closing process. Here are a few factors that can impact the escrow process timeline:
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Whether or not the buyer was pre-approved
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State regulations on the escrow process
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How long it takes the lender to underwrite the loan
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If there are any contingencies added after the inspection
The Escrow Process In 10 Steps
Walking through the escrow process step by step is the best way to learn what to expect. Read through the following list of what happens during escrow:
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Open An Escrow Account
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Wait For Lender’s Appraisal
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Secure Your Financing
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Approve Seller Disclosures
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Get A Home Inspection
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Buy Hazard Insurance
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Get A Title Report & Insurance
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Do A Final Walkthrough
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Review The HUD-1 Form
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Close Escrow
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1. Open An Escrow Account
Escrow begins after an offer is accepted during a real estate transaction. At that time, the buyer will work with their real estate agent to set up an escrow account. A neutral third-party company will hold the account, which will then help manage the transaction. The escrow company could be a financial institution, title company, or escrow agency. This account will hold any money or documents exchanged during the closing process.
The purpose of an escrow account is to protect both parties while the loan and other aspects of the home sale are finalized. Once the buyer opens the escrow account, this is where they will place the earnest money deposit (a portion of the down payment that shows the buyer is serious about the transaction).
2. Wait For Lender’s Appraisal
The mortgage provider will schedule an appraisal during the closing process. This is necessary to secure financing for the property. The appraiser is checking to make sure the property value reflects the offered price. This will ensure the lender is protected in case they were ever to foreclose on the property. If the appraisal comes in too low, buyers have a few options:
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Find a new lender to work with and schedule another appraisal
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Renegotiate with the seller to bring down the sale price
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Back out of the sale and search for a new property
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Provide the appraiser with additional property information to boost the appraisal value
3. Secure Your Financing
The next step for buyers is to secure financing with the lender. After the appraisal is complete, lenders will draft a loan commitment that outlines the potential mortgage amount, interest rate, term, and closing costs. Buyers can use this information to negotiate the best rates directly with their lender. Once the statement is agreed upon, the financing contingency can be removed from the purchase agreement (if applicable).
4. Approve Seller Disclosures
At this point in the process, buyers should be aware of any seller disclosures included during negotiations. Essentially, this means that sellers have shared anything done to the property that may affect the home’s condition. For example, if an addition was added to the house without a permit. Sellers need to disclose this information before the sale can be completed, and buyers will have to approve each item (or walk away from the sale).
5. Get A Home Inspection
Buyers should also be sure to schedule a home inspection during the escrow process, as this will help reveal the property’s true condition. Inspections are not always required during closing, but they are always recommended. The reason is that inspections can reveal aspects of the home that buyers can’t see during a walk-through. There are a few different types of inspections to consider based on the property and where it is located:
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General Home Inspection: A basic home inspection will tell you what condition the house is in. Home inspectors will review the electrical, plumbing, HVAC, roofing, foundation, and more to search for any potential problems with the house. They will issue an official report with recommendations about any necessary repairs.
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Environmental Inspection: Buyers may want to add on additional testing for things like mold, radon gas, and other environmental issues that could affect the home. This can typically be bundled with the general home inspection, but in some cases, you may need to hire a specialized inspector.
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Pest Inspections: A pest inspection will help confirm there are no termites, ants, rodents, or other pests present in the property. If there are, the seller will need to handle the situation before the escrow process can proceed.
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Flood Reports: Depending on where the property is located, it may be a good idea to pull a geographic report of the property. This will reveal whether the property is likely to flood or face other damage from weather events and can impact your homeowner’s insurance policy.
6. Buy Hazard Insurance
Shop around for the best homeowner’s insurance, considering any potential add-ons noted during the inspection process (such as flood or fire insurance). Buyers are required to have homeowner’s insurance for the duration of their mortgage. Lenders will typically recommend a provider, but you are not obligated to work with them. Research insurance companies to compare rates and coverage before buying a policy.
7. Get A Title Report & Insurance
A title report will let you know if there are any tax liens or ownership claims on the property. This is a crucial step to securing financing and moving forward in the escrow process. Your real estate agent or lender will typically recommend a title company to go through, and they will provide you with the report. In addition, buyers can purchase title insurance to protect themselves if any legal disputes regarding property ownership come up in the future.
8. Do A Final Walkthrough
Buyers are given the chance to complete a final walkthrough of the property before the end of the escrow process. The purpose of the final walkthrough is typically to confirm that any agreed-upon changes or repairs were made by the seller. For example, if any issues came up in the inspection, this is the chance to confirm whether or not the seller resolved them. Buyers can also confirm that no new damage was done to the property during the escrow process.
9. Review The HUD-1 Form
A HUD-1 form is used across the United States at the time a mortgage loan is issued. It will specify the buyer and seller’s information, financing details, closing costs, transaction fees, and more. It is crucial to review each portion of this document before the conclusion of the escrow process. The HUD-1 form finalizes the financial details, so be sure to check the accuracy of the document. Pay particular attention to any fees associated with the transaction to avoid being overcharged or surprised by the amount due at the time of closing.
10. Close Escrow
The final step in the escrow process involves a large amount of paperwork for both parties. Once complete, the escrow officer will issue a new deed to the property and name the buyer as the owner. Next, the deed will be submitted to the appropriate county recording offices. Buyers then need to provide the rest of the down payment and funds to cover the remaining closing costs. These funds will be wired directly to the escrow account before ultimately being distributed to the seller and seller’s lender. After these are received, the buyer will receive the keys to their new home, and the escrow account will officially be closed.
What If Escrow Doesn’t Close On Time?
If escrow doesn’t close on time, the buyer or seller will need to renegotiate the timeline of the sale. The most common reasons for this are unexpected issues during the inspection or problems finalizing the loan. Depending on the problem at hand, the buyer or seller may be able to back out of the sale. However, if both parties intend to complete the transaction, then escrow can be delayed until the issues are resolved.
What If You Are Using An FHA Loan?
If you are using an FHA loan, you will be required to keep an escrow account open after closing on the property. After the conclusion of the sale, the escrow account is where you will pay your mortgage, property taxes, and homeowners insurance each month. This will turn your property taxes and insurance costs into smaller monthly payments rather than larger annual ones.
The reason for this is because lenders consider FHA applicants to be at higher risk when approving a loan. The escrow account is used to guarantee each of these expenses are paid regularly. At the end of the year, lenders will be required to give buyers an escrow report detailing each payment. The following year’s costs can be adjusted depending on the size of the account at the end of the year.
Summary
The escrow process protects buyers, sellers, and even lenders during a real estate transaction. The steps listed above will help reveal any potential problems with the house or loan and give all parties a chance to resolve the situation. It is crucial to know what to expect before buying a home, so you are prepared for each step of the escrow process. Navigating escrow will require you to be diligent, but if everything goes according to the plan, you will have the keys to a new home in as little as 30 days.
What is your best piece of advice for navigating the escrow process? Leave a comment below for first-time homebuyers.
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