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The Escrow Process

nantucket-decor-cottage-styleBuying a home is full of complications that many do not understand and are unprepared for. One of those mysterious elements is the escrow process (also called “closing”), which occurs between the time a seller accepts the purchase agreement and the buyer gets the keys to the new house. Below is a 10-step walk-through of the process so you won’t be left standing in the rain without a roof over your head wondering what just happened.

Yes, it’s quite a process but rest assured, you will be kept abreast of the details during the entire process, so no need to be concerned and stressed! 

1. Go into escrow/under contract and open an escrow account
Once you and the seller have signed a mutually acceptable purchase agreement, your agent will collect your earnest money check and deposit it in an escrow account at the escrow company specified in the purchase agreement.

The escrow company acts as a neutral third party to collect the required funds and documents involved in the closing process, from the initial earnest money deposit to the loan documents to the signed deed.

2. Await the bank’s appraisal
The bank providing the mortgage will do its own appraisal of the property (which the buyer usually pays for) to protect its financial interests in case it needs to foreclose on the property.

3. Secure financing
You should have already been preapproved for a mortgage at the time your purchase agreement was accepted. Once you give your lender the property address, it will prepare a good faith estimate, or a statement detailing your loan amount, interest rate, closing costs and other costs associated with the purchase. You may want to negotiate the numbers on this document before you sign it. Once you have your written loan commitment, it’s time to remove the financing contingency in writing.

4. Approve the seller’s disclosures
During this step, you will receive, if you’ve not already, the seller mandated disclosures identifying any obvious or known problems with the property.  You have the option to accept or reject these conditions, ultimately deciding to move forward with the purchase or to cancel the contract.

5. Obtain the necessary inspections

Home InspectionHome Inspection
You aren’t required to obtain a home inspection when you purchase ahome, but it’s in your best interest to do so. For a few hundred dollars, a professional home inspector will tell you if there are any dangerous or costly defects in the home. If there are, you’ll want to know about them so you can back out of the purchase, ask the seller to fix them, or ask the seller to lower the price so you can handle the repairs yourself. If the inspection process concludes satisfactorily, you will then need to remove the inspection contingency in writing. (You’ll repeat this step after any other inspections.)

Pest Inspection
If the lender does not require a pest inspection, you may still want to get one to ensure that the house does not have termites, carpenter ants, or other pests such as roaches or rats. These problems may not be apparent during the daytime hours when you’ve most likely viewed the house, and would be a terribly unwelcome discovery after you move in. If there are any pest problems, they will need to be rectified before the sale can proceed (assuming that you want to continue with the purchase). This is another area where you may want to renegotiate with the seller to pay for the work.

home_inspectionEnvironmental Inspection
It is mandatory to get an environmental inspection. There can be problems on the home site, like contamination from a location near a landfill, former oil field, dry cleaner, gas station or other environmentally hazardous business. Any problems uncovered in this area can mean health hazards and may be prohibitively expensive to fix.

Other Inspections
Areas subject to earthquakes may require a soils report and/or a geologic report to assess the risk of serious damage to the property in the event of such a disaster. Many areas require flood reports. In rural areas, a land survey should be done to verify the boundaries of the property (in urban areas, the boundaries tend to already be very clear).

6. Get hazard insurance
This includes homeowners insurance and any extra coverage required in your geographic area (such as flood insurance). You will be required to have homeowners insurance until your mortgage is paid off (and you’d probably want it, anyway).

7. Acquire the title report and title insurance
These are also required. The title report makes sure that the title to the property is clear – that is, that there are no liens on the property and that no one else but the seller has a claim to any part of it. Title insurance protects you (and the lender) from any legal challenges that could arise later if something didn’t show up during the title search. If there is anything wrong with the title (known as a cloud or defect), the seller will need to fix it so the sale can proceed or let you walk away.

insurance8.  Conduct a final walk-through
The intent of the walk-through is to verify the property is in precisely the condition as when you originally purchased it and that all agreed upon repairs/improvements have been completed. It’s a good idea to re-inspect the property just before closing to make sure that no new damage has occurred and that the seller has left you items specified in the purchase agreement, such as appliances or fixtures.

9. Review the HUD-1 form
At least one day before closing, you will receive an HUD-1 form, or the final statement of loan terms and closing costs. Compare it to the good faith estimate you signed earlier. The two documents should be very similar. Look for unnecessary, unexpected or excessive fees as well as outright mistakes.

10. Close escrow
The closing process means you’ll need to sign a ton of paperwork, which you should take your time with and read carefully. After all the papers are signed, the escrow officer will prepare a new deed naming you as the property’s owner and send it to the county recorder. You’ll submit a cashier’s check or arrange a wire transfer to pay for your down payment and closing costs, and your lender will wire your loan funds to escrow so the seller and, if applicable, the seller’s lender, will be paid. The county will then record the documents and the home is yours.

Congratulations, now you get the keys! This is the time to plan a moving party, inviting friends and family over to check out your new, humble abode.

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