What is an Escrow?
After you make an offer on a piece of property and the offer is accepted, an escrow account will be opened. When opening an escrow, the Buyer and Seller of a piece of property establish terms and conditions for the transfer of ownership of that property. These terms and conditions are given to a third party known as the Escrow Holder. The Escrow Holder in turn has the responsibility of seeing that the terms of the escrow are carried out.
How Do I Open an Escrow?
Your real estate agent will open the escrow for you. As soon as you execute the Purchase Agreement, the agent will place your initial deposit into an escrow account. Escrow instructions define all the conditions that must occur before the transaction can be finalized. The escrow instructions represent your statement to the Escrow Holder. They also provide title insurance protection for the home.
How Will I Know Where My Money Has Gone?
Written evidence of the deposit is generally included in your copy of the Purchase Agreement (sometimes called an Agreement to Purchase and Receipt for Deposit). The funds will then be deposited in a separate escrow or trust account and processed through a local bank.
How Escrow Works
The escrow is a depository for all monies, instructions, and documents necessary for the purchase of the property, including the Buyer’s funds for down payment and the lender’s funds and documents for the new loan. Generally, the Buyer deposits a down payment with the Escrow Holder and the Seller deposits the deed and any other necessary papers with the Escrow Holder.
Before close of escrow, the Buyer deposits the funds required and agreed upon by the parties to the sale with the Escrow Holder. The Buyer instructs the Escrow Holder to deliver the monies to the Seller once the Escrow Holder has completed the following tasks:
- Recording the deed.
- Delivering to the Buyer a policy of title insurance that shows title to the property vested in the name of the Buyer.
The Escrow Holder is authorized to deliver the deed to the Buyer when the Buyer has deposited the agreed-upon purchase price and fulfilled any other conditions specified in the escrow instructions.
An explanation of the various documents involved in closing a loan follows.
- HUD-1 Settlement Statement: Required by federal law, this form itemizes the services provided and lists the charges to the buyer and the seller. It is completed by the escrow agent who conducts the closing. Both the buyer and the seller receive a copy.
- Truth-In-Lending (TIL) Statement: This is another document required by federal law to protect the consumer. Its purpose is to make sure the consumer is fully aware of the costs and certain loan terms involved in borrowing money. Mortgage lenders are required to give this statement to all loan applicants within three days of receiving their initial application.
- The Promissory Note: The note represents your promise to pay the lender according to the agreed upon terms. It is, in effect, a legal IOU.
- Security Instrument: The security instrument is either a mortgage or a deed of trust. In California, the deed of trust is the legal document that secures the loan that you received from the lender to buy the home. It gives the lender a claim against your house if you default on the note’s terms.
Based on the escrow instructions of both parties, the Escrow Holder will also handle the prorations and adjustments on any hazard insurance, mortgage insurance, real estate taxes, etc. These are commonly referred to as closing costs.