What
Exactly Is An Escrow?
An escrow occurs when a neutral third party holds the documents
and monies involved in a real estate transaction and ensures
that all conditions of the transaction are met. Escrow also
refers to a special account that a lender establishes to hold
monthly installments from the borrower to cover property taxes
and insurance.
Why is it needed?
People
buying and selling real estate often open an escrow for their
protection and convenience. The buyer can instruct the escrow
holder to disburse the purchase price only upon the satisfaction
of certain prerequisites and conditions. The seller can instruct
the escrow holder to retain possession of the deed to the buyer
until the seller's requirements, including receipt of the purchase
price, are met. Both rely on the escrow holder to carry out
faithfully their mutually consistent instructions relating to
the transaction and to advise them if any of their instructions
are not mutually consistent or cannot be carried out. An escrow
is convenient for the buyer and seller because both can move
forward separately but simultaneously in providing inspections,
reports, loan commitments and funds, deeds, and many other items,
using the escrow holder as the central depositing point. If
the instructions from all parties to an escrow are clearly drafted,
fully detailed and mutually consistent, the escrow holder can
take many actions on their behalf without further consultation.
This saves much time and facilitates the closing of the transaction.
Who May Hold Escrows
The escrow
holder may be any disinterested third party (although some states
require that certain escrow holders be licensed).
There are
two important reasons for selecting an established, independent
escrow firm, an attorney, or an escrow officer with a bank,
S&L or title insurance company. One is that real estate
transactions require a tremendous amount of technical experience
and knowledge to proceed smoothly. The other is that the escrow
holder will generally be responsible for safeguarding and properly
distributing the purchase price.
Escrow officers
with established firms generally are experienced and trained
in real estate procedures, title insurance, taxes, deeds and
insurance.
What Does An Escrow Holder Do?
An
escrow holder is a neutral third party who takes instructions
based on the terms of the real estate transaction and, when
necessary, the lender’s requirements.
What Are The Duties Of The Escrow
Holder?
- Receiving and holding all monies, instructions,
and documents pertaining to the real estate transaction.
- Serving as the communication link and
liaison between all parties.
- Requesting a preliminary title search
to determine the status of title to the property.
- Requesting a beneficiary statement
or payoff demand from existing lenders.
- Holding inspection reports, deeds,
and insurance documents.
- Complying with the lender’s requirements
in its instructions to escrow.
- Preparing or obtaining the grant deed.
- Prorating taxes, interest, insurance,
rents, and other costs related to the property.
- Recording the deed and other documents.
- Requesting the title insurance policy.
- Closing the escrow according to the
instructions of the buyer, seller, and lender.
- Disbursing funds as authorized by the
instructions, including charges for real estate commissions,
loan payoffs, title insurance, taxes, recording fees, and
other costs.
- Preparing final statements of disposition
of all funds.
Key terms and phrases commonly associated
with escrow include:
Escrow payment:
Funds that a mortgage servicer withdraws from a borrower's escrow account
to pay property taxes and insurance.
Escrow analysis:
A
lender's periodic examination of an escrow account to determine
if the lender is withholding enough funds from a borrower's
monthly mortgage payment to pay for expenses such as property
taxes and insurance.
Back-to-back escrow:
Arrangements that an owner makes to oversee the sale of one property and
the purchase of another at the same time.
Escrow closing:
An
escrow closing occurs when all conditions of a real estate transaction
are met and the title of the property is transferred to the
buyer.
Escrow Company:
A
firm that acts as a neutral third party to ensure that all conditions
that the buyer, seller, and lender establish in a real estate
transaction are met.
What are Escrow Instructions?
Escrow instructions
are written documents, signed by the parties giving them, which
direct the escrow officer in the specific steps to be completed
so the escrow can be closed.
Typical
instructions would include the following:
- The method
by which the escrow holder is to receive and hold the purchase
price to be paid by the buyer.
- The
conditions under which a lapse of time or breach of purchase
contract provision will terminate the escrow without a closing.
- The
instruction and authorization to the escrow holder to disburse
funds for recording fees, title insurance policy, real estate
commissions and any other closing costs incurred through escrow.
- Instructions
as to the proration of insurance and taxes.
- Instruction
to the escrow holder on the payment of prior liens and charges
against the property and distribution of the net sale proceeds.
- Since
the escrow holder can only follow the instructions as stated,
and may not exceed them, it is extremely important that the
instructions be stated clearly and be complete in all details.
What each Party does:
It all begins with the offer
and acceptance skillfully negotiated by
the real estate agents
representing Buyer and Seller.
The
Buyer(s) |
The
Lender
(when applicable) |
The
Escrow Officer |
The
Seller(s) |
Title
Company |
| Tenders
a written offer to purchase (or accepts the Seller's counter-offer)
accompanied by a good faith deposit amount. |
Accepts
the new loan application and other related documents from
the Buyer(s) and begins the qualification process. |
Receives
an order for escrow and title services. |
Accepts
Buyer's Offer to Purchase and initial good faith deposit
to open escrow. |
Receives
an order for title service. |
| Approves
and signs the escrow instructions and other related instruments
required to complete the transaction. |
Orders
and reviews the property appraisal, credit report, verification
of employment, verification of deposit(s), preliminary report
and other related information. |
Orders
the preliminary report and examination on the subject property
from Chicago Title. |
Submits
documents and information to escrow holder, such as: addresses
of lien holders, tax receipts, equipment warranties, home
warranty contracts, any leases and/or rental agreements. |
Examines
the public records affecting the real property and issues
a preliminary report. |
| Approves
the preliminary report and any property, disclosure or inspection
report called by the purchase and sale agreement. (Deposit
Receipt) |
Submits
the entire package to the loan committee and/or underwriters
for approval. When approved, loan conditions and title insurance
requirements are established. |
Acts
as the impartial "stakeholder" or depository,
in a fiduciary capacity, for all documents and monies required
to complete the transaction per written instructions of
the principals. |
Approves
and signs the escrow instructions, grant deed and other
related documents required to complete the transaction. |
Determines
the requirements and documents needed to complete the transaction
and advises the escrow officer and/or agents. |
| Approves
and signs new loan documents and fulfills any remaining
conditions contained in the contract, lender's instructions
and/or the escrow instructions. |
Informs
Buyer(s) of loan approval terms, commitment expiration date
and provides a good faith estimate of the closing costs. |
Prepares
the escrow instructions and required documents in accordance
with terms of the sale |
Orders
inspections, receives clearances and approves final reports
and/or repairs to the property as required by the terms
of the purchase and sale agreement (Deposit Receipt). |
Reviews
and approves the signed documents, releases and the order
for title insurance, prior to the closing date. |
| Deposits
funds necessary to close the escrow. Approves any changes
by signing amendments in the escrow instructions. |
Deposits
the new loan documents and instructions with the escrow
holder for Buyer's approval and signature. v |
With
the authorization from the real estate agent or principal,
orders demands on existing deeds of trust and liens or judgments,
if any. For assumption or subject to loan, orders the beneficiary's
statement or formal assumption package. |
Fulfills
any remaining conditions specified in the contract and/or
escrow instructions; approves the pay off demands and/or
beneficiary's statements. |
When
authorized by the escrow officer, Title Company records
the signed documents with the County Recorder's office and
prepares to issue the title insurance policies. |
| |
Reviews
and approves the executed loan package and coordinates the
loan funding with the escrow officer. |
Reviews
documents received in the escrow: preliminary report, payoff
or assumption statements, new loan package and other related
instruments. Reviews the conditions in the lender's instructions
including the hazard and title insurance requirements. |
Approves
any final changes by signing amendments to the escrow instructions
or contract. |
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Presents
the documents, statements, loan package(s), estimated closing
statements and other related documents to the principal(s)
for approval and signature, and requests the balance of
the buyer's funds. |
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Reviews
the proceeds of the loan(s) from the lender(s). |
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Determines
when the transaction will be in the position to close and
advises the parties. |
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Assisted
by title personnel, records the deed, deed of trust and
other documents required to complete the transaction with
the County Recorder and orders the title insurance policies. |
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Closes
the escrow by preparing the final settlement statements,
disbursing the proceeds to the Seller, paying off the existing
encumbrances and other obligations. Delivers the appropriate
statements, funds and remaining documents to the principals,
agents and/or lenders. |
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Contents Source: Chicago
Titlte Company
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