Closing is not something most Buyers focus on during their home search. Most people assume closing just kind of works itself out, but this is far from the case.
Closing – or rather, the "escrow process" in real estate parlance – is complex and if something goes wrong, it can really damage your deal. Savvy buyers are actively involved throughout the escrow process.
We will go through the basics of escrow, and also cover what you, the buyer, can do to make things run smoothly.
Escrow involves four primary parties: the buyer, the seller, the lender and the escrow company. The escrow company acts as a neutral third party (paid 50/50 by buyer and seller) who holds documents and funds until the transaction is completed.
The four primary parties will also interact with a smattering of other people during escrow, including the realtors, home inspectors, insurance companies, and appraisal companies.
Escrow Typically takes 1-6 weeks, depending on the type of loan you have, and a number of variables out of your control. With the recent surge in foreclosures and government incentive programs, the real estate closing machinery has gotten a little backed up in places, so be ready for it to take longer than usual.
Finding an Escrow Company
Your Realtor can usually recommend an escrow company, or if you're buying into a condo building, the developer may have an escrow company that they're working with. There are different customs in different areas dictating who selects the escrow company, but it is wise to ensure that the company selected is reputable (ask around or do a Google search).
Who Does What
- The escrow officer opens an account and collects your deposit (earnest money), obtains the loan information from the lender, and the contract for the transaction. Near the end of escrow, the escrow officer completes a closing statement (or HUD), showing all the costs associated with closing, including your down payment. This is how you'll know how much money to the penny you'll need to bring to closing – up till now, you've only seen estimates.
- The lender orders an appraisal, to ensure it's worth what you're paying for it. (This assessment of purpose is to ensure you've got sufficient collateral for your loan.) The appraised value is not something that the seller needs to know – all that matters is that the appraisal came in "at value." Sometimes, a lender will let you know separately if the appraisal actually came in "over value."
- The buyer (you!) Purchases title insurance (in some cases, escrow companies can sell title insurance to you). This insurance basically insures that the title is "clean," meaning no one can come out of the woodwork at some point down the road and claim that you do not legally own your home. You will also need to purchase homeowners insurance during escrow; you can have coverage start on your closing date. Before closing, you'll have the chance to do a final walk-through to ensure that any repairs you requested have been made and that the property is being delivered in acceptable condition.
Closing is completed when:
- Buyer and seller have signed documents
- Buyer's money is deposited into escrow
- Lender has approved the signed documents
- New deed and financing docs have been recorded
- Lender has wired loan funds
Bottom line of closing and escrow:
- As the buyer, you will not have to do a lot of work
- Your unofficial job, however, is to make sure that everyone else is doing their jobs with polite "check in" emails
- You must respond to all communications quickly to keep things rolling
- You must have your funds ready in a liquid account, ready to make the transfer
- Missing your closing date is a bummer that can range from minor to debilitating – do everything you can to meet your closing date