What Happens During the Escrow Process?

Escrow serves as a neutral third-party holding funds and documents during a real estate transaction. Its purpose is to safeguard both the buyer and the seller by ensuring all specified conditions of the sale are met before the transfer of ownership and funds occurs. This process provides a structured framework for property exchange.

Initiating the Escrow Process

The escrow process begins once a purchase agreement, signed and accepted by both buyer and seller, is delivered to an escrow company. An escrow officer is assigned to the transaction, establishing a new file and acting as the impartial party overseeing the process. This initial setup involves gathering necessary information from both sides.

Following the opening of escrow, the buyer typically deposits earnest money into the dedicated escrow account. This deposit, often ranging from 1% to 3% of the purchase price, demonstrates the buyer’s intent to proceed. The escrow officer holds these funds, ensuring they are not released until agreed-upon conditions are satisfied or the transaction closes. The escrow company also sends initial instructions and requests for information to all involved parties.

Navigating Contingencies and Due Diligence

This phase involves a thorough investigation of the property by the buyer and the securing of necessary financing, while sellers provide required disclosures. Buyers arrange for inspections, such as general home and pest inspections, to evaluate the property’s condition. After reviewing reports, buyers may negotiate with the seller for repairs or credits if significant issues are discovered.

A property appraisal is a standard requirement, particularly when a buyer is obtaining a loan, to determine the property’s fair market value. The lender relies on this appraisal to confirm the property provides sufficient collateral for the loan amount. If the appraisal comes in lower than the agreed-upon purchase price, it can necessitate renegotiation or require the buyer to increase their down payment. Concurrently, the buyer’s loan application moves into underwriting, where the lender reviews financial documents like income statements, bank records, and credit history to confirm eligibility for the mortgage.

A title search is conducted to confirm the seller’s legal ownership and to identify any existing liens, easements, or other encumbrances. Title insurance is then purchased to protect both the buyer and the lender against potential future claims or defects in the title. Sellers are also obligated to provide various disclosures, which may include information about the property’s condition, lead-based paint hazards, or natural hazard zones. Buyers review these documents to understand the property’s history and potential issues. Once satisfied, buyers formally remove their contingencies, such as inspection, appraisal, and loan contingencies, signaling their commitment to proceed.

Completing Financial and Legal Requirements

With due diligence complete and contingencies removed, the process shifts to procedural steps leading to final funding. After loan underwriting concludes, the lender provides final approval and prepares loan documents. These documents, which include the promissory note and deed of trust or mortgage, are presented to the buyer for signature.

Both the buyer and seller receive a Closing Disclosure, a standardized form that itemizes all costs associated with the transaction, including loan fees, escrow fees, and real estate commissions. Federal regulations require the buyer receives this document at least three business days before closing, allowing time for review. This three-day review period ensures transparency.

Subsequently, the buyer arranges for the transfer of their remaining funds, including the down payment and any additional closing costs, to the escrow account. These funds are typically wired. Simultaneously, the seller signs the deed, which legally transfers ownership, along with any other necessary transfer documents, with the escrow officer. These actions prepare all financial and legal components for official recordation.

Finalizing the Transaction

The final steps of the escrow process bring the transaction to a close and legally transfer property ownership. Once all buyer documents are signed and all conditions are met, the buyer’s lender wires the loan funds directly to the escrow account. This funding means all monies are consolidated within the neutral escrow holder.

The escrow officer then sends the deed and other transfer documents to the county recorder’s office for official recording. The moment the deed is recorded, legal ownership formally transfers from the seller to the buyer. This action updates public records to reflect the new ownership.

Upon confirmation of recording, the escrow officer disburses all funds according to the Closing Disclosure. This includes paying off the seller’s existing mortgage, distributing net proceeds to the seller, paying real estate commissions, and settling all other closing costs. The escrow company also releases any remaining original documents to the appropriate parties, officially closing the escrow. Finally, the buyer receives the keys to their new property.