When entering escrow, real estate clients should work with a reliable and experienced team to protect their interests. Here’s what you need to know about the roles and responsibilities of an escrow company when buying property.
What Is The Role Of A Title And Escrow Company In Real Estate?
During escrow, the homebuyer puts down an earnest money deposit for a third party, usually a brokerage or title company, to hold until previously agreed-upon conditions are met. The company will also hold the property and title in escrow until settlement. Although escrow is usually overlooked in real estate transactions, buyers will benefit from working with an escrow company when purchasing or refinancing a home.
How Does It Work?
Escrow is the next step after the seller accepts an offer and the purchase agreement is ratified and signed by both parties. During escrow, real estate buyers make a deposit for the earnest money, down payment, and closing costs in an escrow account, which can also hold funds for property taxes and homeowner’s insurance.
In real estate, escrow serves the following purposes:
- To protect your good faith deposit and ensure that the money goes to the right party as stipulated by the conditions of the purchase agreement.
- To keep funds for other expenses related to the sale, such as real estate taxes and insurance premiums.
There are two types of escrow accounts to serve each purpose: one for the buying process and another for the duration of a mortgage.
Escrow Accounts For Buying A Home
It’s customary to set up an escrow account to hold the deposit money, where it will remain until the transaction closes. The amount will go towards the down payment. Most purchase agreements require a good faith deposit, or earnest money, to show that the buyer is serious about completing the real estate purchase. If the buyer fails to meet the conditions of the contract and the sale falls through, the seller can keep the earnest money.
In some cases, the money can be held in escrow long after the sale is finalized. This practice is called an escrow holdback and applies to unique circumstances – for example, the seller has requested to stay in the home for another month, or the buyer uncovers significant issues with the property during the final walkthrough.
When having a new home built, the money will remain in escrow until the buyer has approved all the construction work to be done. The money will be released to the concerned party – the builder, seller or contractor – once the conditions of the sale have been fulfilled.
Escrow Accounts Related Expenses
After closing a transaction, the lender may set up an escrow account for real estate tax and insurance payments. The lender or mortgage servicer will keep a portion of monthly mortgage payment in the escrow account until tax and insurance are due.
The servicer will estimate your escrow payments for the coming year based on previous payments since tax and insurance payments can vary from one year to the next. They will make sure that there’s a sufficient amount in the escrow account by requiring you to deposit at least two months’ worth of additional payments.
To make sure that they’re not overcharging your escrow account, they will check your records annually. If they find any discrepancies in your account, they will give you an escrow refund.
However, if records show that they’ve collected less than the correct amount, you will be asked to make a one-time payment to address the discrepancy, or increase your monthly mortgage payments to cover the difference.
Why Is Escrow Important?
Escrow protects the buyer. Never give a deposit directly to the seller – escrow services are meant to protect you from fraudulent activity during the real estate transactions, particularly if you’re buying from out of state and making payments over long distances. An escrow service is a neutral third party that will make sure that your earnest money is secure while your agent makes sure that the conditions of the purchase agreement are met.
An escrow account will keep your deposit secure during the homebuying process. Let’s say the home inspection detects major structural defects in the structure and the sale falls through due to the conditions of the sale – the seller is highly unlikely to return your deposit money if you’ve given it to them directly.
But if the deposit money is held by an escrow company with no vested interest in the transaction, there’s a bigger chance of the money being returned to you depending on the terms of the sale.
Who Are The Key Players?
- Buyer – As a buyer, working with an escrow company will give you peace of mind as you go through the real estate transaction.
- Seller – You and the seller can discuss several options for escrow service. Choose a third party that will remain professional and impartial throughout the sale.
- Lender – Your lender will also benefit from escrow services for real estate taxes and insurance premiums after the sale is finalized.
- Real estate agent – Your real estate agent may refer you to an escrow company that they have previously worked with.
- Title company & settlement officer – The officer will keep your earnest money secure and remain impartial during the closing process.
What Documents To Expect At Your Close Of Escrow
- Lender’s documents – The lender will prepare various forms and send them to the escrow service for signing. The escrow company will gather all the paperwork that requires your signature for the sale. Lender’s documents typically include the HUD 1 settlement and closing statement (HUD1) and other legal papers.
Once the lender’s documents have been duly accomplished and signed, the escrow company will send them back to the lender for review. If the lender is certain that all required paperwork has been signed and that all loan conditions have been fulfilled, they will notify the escrow company that they are ready to release the loan funds to the concerned party. - Deed and deed of trust – As two of the most important documents in a real estate transaction, these are essential to transfer the title of a property from one owner to the next. In real estate, a deed is a legal document that has been signed or executed with the necessary formality.
The deed indicates the form of ownership in which the buyer takes title (i.e. individually, in joint tenancy, in trust, other tenancies, etc.) After the sale has been finalized, the deed is submitted to the county recorder of deeds and becomes publicly available. As a buyer, recording your deed with the county clerk will add your name to the property’s chain of title, identifying you as the lawful owner of the property.
The main difference between the deed and deed of trust lies in which party the contract seeks to protect. The warranty deed offers protection to the property owner while the deed of trust is a safeguard for the lender, also called the beneficiary.
A deed of trust identifies a lender, borrower, and trustee. The escrow company typically serves as the trustee with the task of holding the title to the property until the borrower finishes paying off the loan. In the event that you are unable to repay your mortgage, the escrow company can initiate the foreclosure process through an attorney. - Affidavits – Other important documents in escrow include the affidavit of title, which is also called the seller’s affidavit or seller’s closing affidavit. The affidavit of title is meant to protect the buyer, who may find themselves liable for any pending legal matters attached to the property once they take ownership of it. This affidavit typically contains the seller’s personal information along with statements on the status and suitability of the property being sold. It is signed by the seller on the closing date along with other documents, such as the bill of sale, assignment of parking space, warranty deed, and power of attorney.
This document gives the buyer and title insurance company some added protection as it requires the seller to swear under penalty of perjury that the property being sold is free and clear of liens. They must also swear that there aren’t any title defects that may have gone undetected by the title search and that there are no pending legal matters that could potentially affect liens.
The name of these affidavits vary by state, but generally speaking, the affidavit of title is a sworn and notarized statement in which the seller confirms lawful ownership of the property and describes any known title defects, including liens, leases, or any work on the property that could possibly results in liens and boundary line disputes. It also describes outstanding contracts indicating the sale of the home.
Aside from the affidavit of title, the lender may also ask the buyer to sign affidavits certifying that they intend to occupy the home as their primary residence. They may also present documents in which the buyer confirms their legal name as well as other names and aliases that they use on various legal documents and financial accounts. - Transfer tax documents – These documents usually include transfer tax declarations. It’s customary for many municipal governments, counties, and states to impose real property transfer taxes. The buyer and seller must sign transfer tax declarations disclosing the accurate purchase price and calculating the applicable tax rates.
- Loan documents – There are several loan documents involved in the close of escrow, including:
- Mortgage note. This document is evidence of the borrower’s debt. It includes a description of the mortgage terms, including the amount of the debt, initial interest rate, terms of interest rate changes, and the time and place that the borrower must repay what they owe.
The mortgage note also provides a description of how the lender might collect, transfer, or sell debt. If the lender sells the loan, they will pass this note along to whoever purchased the loan, giving the mortgage note monetary value similar to a money order. - The deed of trust or mortgage. As a buyer, you’ll be asked to sign a deed of trust or mortgage when you apply for a home loan. This document states an agreement with the buyer to use the property as collateral for the mortgage. Along with the deed, the deed of trust is submitted to the county recorder’s office and effectively becomes a lien attached to the property. By creating a lien on the property, this document provides added security for the mortgage as evidenced by a promissory note.
With the deed of trust, the lender owns an interest in the property that equates to the borrower’s outstanding debt. If the borrower fails to make timely payments or breaches the terms of the loan, the lender has the right to foreclose upon the property and sell it to recoup their loss. - Loan application. For this document, the lender will produce a new form containing the information you provided in your original loan application. They will have you go over the loan application and check for inaccuracies before having you sign it. If anything about your financial situation has changed significantly since your initial loan application, such as job loss or additional debt, it’s imperative to inform the lender before signing this document.
- Loan estimate and closing disclosure. The loan estimate contains important details about the loan, including an estimate of monthly payments, closing costs, and mortgage fees. Borrowers should ideally receive a copy of their loan estimate within three days of submitting a loan application to the lender, in addition to another copy at closing.
The closing disclosure is simply the finalized version of the loan estimate. These documents provide additional information to help buyers develop a better understanding of the mortgage transaction.
- Mortgage note. This document is evidence of the borrower’s debt. It includes a description of the mortgage terms, including the amount of the debt, initial interest rate, terms of interest rate changes, and the time and place that the borrower must repay what they owe.
- Lender’s package – The lender’s package contains other disclosures and agreements, including the compliance agreements, IRS forms (4506 and W-9), servicing disclosures, and tax and insurance escrow forms, among others.
- Proof of funds (PoF) – This document states how much money the borrower has available. When purchasing a home, buyers can present proof of funds to convince the seller that they have the financial means to purchase a home as well as cover purchase costs, which usually include the down payment, closing costs, and other related fees.
- Commission instructions – The commission’s instructions form indicates how the listing and buyer’s brokerage intend to distribute or modify compensation from the sale between themselves. It also provides the escrow company or closing office with instructions on the disbursement of commissions to the corresponding brokerage.
- Wire transfer instructions – This document contains the escrow company’s financial information, such as their bank’s name, account number, American Bankers Association (ABA) number, and routing number. The wire transfer instructions should also include the amount of money that needs to be sent.
- Closing disclosure – As a legally required document, the closing disclosure includes five pages containing detailed information on the final loan terms, monthly mortgage payments, closing costs, and other fees. The browser can expect to receive this document about three days before closing on their home loan, giving them a window of opportunity to make sure that all the terms are accurate as well as resolve any issues or discrepancies in the closing disclosure.
Work With Integrity Title & Escrow Company, LLC
If you need a reliable partner in the escrow process, call our team at 410.581.6861 or send a message here. Integrity Title & Escrow Company, LLC is a certified Minority Business Enterprise (MBE) and Women Business Enterprise (WBE) specializing in residential and commercial real estate. As a full service title and settlement company, our coverage areas include D.C., Maryland, and Virginia.