Understanding the Escrow and Closing

When you and the seller have signed an agreement on the terms of the sale, you’ve got a ratified contract. Now you enter the final stage of the home-buying process, which is called escrow.

Escrow

Escrow means putting something in the hands of a neutral third party. Depending on where the transaction is taking place, the escrow officer can be a lawyer or a title company. Once you have a ratified contract, you should summon an escrow officer—your real estate agent will have a relationship with one—and put all the relevant documents and funds into escrow.

The Escrow Officer

In return for a fee of about $1,000, the escrow officer “referees” the deal. The escrow officer makes sure that:

• All paperwork is signed and made part of public record
• Both buyer and seller meet all contractual obligations
• All monies change hands
• A title search is performed (see below)

The Preliminary Title Report

After escrow has been opened, you’ll receive a document called the preliminary title report, or “prelim,” from the title company. The report will show:

• The name of the property owner
• Taxes or liens against the property
• Third-party restrictions, such as public or private easements (for example, a grant to an electricity company to plant a pole on your property)

It’s at this stage that the title contingency in your contract comes into play. Look over the report very carefully. If there are surprises on it—such as a lien you didn’t know about—you have the right to insist either that the seller settle the claims or that the purchase price be reduced.

Inspection

To get a mortgage, you typically have to get the home inspected. The inspection is intended to protect the lender as much as it is to protect you. If your lender does not require an inspection, you should still have a professional go through the house thoroughly to avoid unacceptable defects or uninsurable conditions.

• Interior and exterior components inspection: Covers every important part of the house: foundation, insulation, kitchen and bathroom, plumbing, heating, cooling, electric, walls, roof, and gutters. The inspection should last at least three hours and cost about $250–500.
• Pest control inspection: Checks for signs of pest or fungal infestation; usually costs about $75–150.

If you’re planning to renovate your new house, you should have a general contractor or architect do an inspection and get an estimate on renovation costs.

How to Choose an Inspector

Hire an independent inspector with no ties to your real estate agent. Don’t choose an inspector based on price because paying for a quality inspector can save you plenty of money in the long run. A good inspector should:

• Belong to the American Society of Home Inspectors
• Have errors-and-omissions insurance that will pay you if the inspector makes a mistake
• Provide you with an extensive written report
• Let you come along on the inspection
• Provide references and have satisfied clients

The Inspection Checklist

The written report your inspector provides should cover these interior and exterior areas of your property:

Ceilings, Chimney, Cooling systems,Decks, porches, balconies, Doors, Drainage systems, Fireplaces, Floors, Foundation, Gutters, Heating systems, Pests, Plumbing, Pool, Roof, Siding, Stairs, Walkways, Walls, Windows, Wiring, Yard.

If the Inspection Uncovers Problems

If the inspector finds problems, the inspection contingency in the contract allows you to renegotiate. Ask the seller to pay for the needed work or lower the purchase price.

Appraisal

Lenders typically require prospective home buyers to hire an appraiser to assess the fair market value of the property— what the property is actually worth. Though lenders often offer to conduct and even pay for this service, it’s a good idea to hire an independent appraiser yourself. A comprehensive and accurate appraisal should consider all of these aspects of the property:

• Appearance
• Condition
• Build quality
• Location
• Unique features
• Upgrades
• Value of comparable properties

Homeowner’s Insurance

As a prerequisite to getting a mortgage, most lenders require you to get homeowner’s insurance that protects your home (and the lender’s investment) against:

• Damage (from fire, flood, and so on): Get a policy with guaranteed replacement costs, which ensures complete coverage of reconstruction.
• Loss of personal property: Most policies cover about 70% of losses. More expensive policies cover replacement costs as well.
• Liability (for personal injury on your property): Get liability coverage that covers at least two times the value of your home.

The size of your monthly insurance payments, or premiums, depends on the comprehensiveness of the coverage and the characteristics of the particular region where the house is located. If you’re buying a home in an area prone to disasters such as floods or earthquakes, you need to add additional (and costly) riders to your insurance. Don’t skimp on these riders—they’re essential.

Mortgage Application

Even if you’re prequalified or preapproved for a loan, you still have to apply to get the mortgage when the time comes. To speed up the loan application process, have these application documents ready:

• Final contract signed by both buyer and seller
• Social Security number(s) of applicant(s)
• Addresses for the past two years (plus landlords’ names and addresses if you were a renter)
• Income earned from all employers for the past two years (include employer names and addresses as well)
• W-2 tax forms from previous two years
• Pay stub showing most recent year-to-date earnings
• Balance and monthly payments of all loans and charge accounts for the last three months
• Balance for the last three months (along with names, addresses, and account numbers) associated with all savings, checking, investment, and other accounts
• Documents, such as cancelled checks, that show income related to child support and alimony, if relevant

Title and Owner’s Insurance

Title is legal ownership of a particular piece of real estate. When you buy a property from a seller, the title for that property passes to you (or your lender). On rare occasions, a real estate sale may transpire in which title doesn’t transfer from seller to buyer due to error or fraud. Though such an oversight isn’t usually the buyer’s fault, it’s the buyer who pays if things go wrong.

Title Insurance

For a hefty one-time fee of 0.5%–1% of the mortgage value, the title company (which often acts as the escrow officer as well) researches the title of the property and guarantees that it’s valid. If it turns out that the title company’s research was wrong—that the title was not valid and someone has made a claim against the land—the title company will cover your costs.

Owner’s Insurance

The title insurance you buy definitely protects your lender, but it won’t necessarily protect you after you’ve paid off the mortgage. When you buy title insurance, make sure you’re buying a policy that protects both the lender and you, the homeowner. In some states, the two policies come bundled together. In other states, you may have to pay an additional fee of $30 or so.

Taking Title

For a single homeowner, taking title means transferring the title from the seller to the buyer. When this happens, the buyer becomes the sole owner of the property. If you’re buying property jointly with another person, you’ll have to choose the form you want your co-ownership to take— that is, how you’d like to take title.

The most popular way of taking title when two people buy a home is called joint tenancy. In a joint tenancy, the owners hold the title to the property equally, so one owner can’t sell or change the property without the other’s approval. Most couples opt for joint tenancy, in part because it provides tax breaks should one member of the couple die and the other inherit full ownership of the home.

Walkthrough

Just before the day of closing escrow (the day you officially take ownership of your new home), you’ll have a chance to take a final walkthrough of the home. The walkthrough gives you one last chance to inspect the property to make sure no additional damage has occurred since you last saw it. The verification of condition contingency allows you to renegotiate should you discover any significant last-minute problems.

Closing Escrow (The Closing)

The closing is the final meeting between the buyer, the seller, their respective agents and lawyers, and an escrow officer who takes checks and literally closes the deal (in some states, you may have had to hand over the funds before the closing). As the buyer, you receive the following at the closing:

• Deed of trust on the property
• Mortgage note
• Final sales contract
• Closing statement (recording all the money involved in the transaction)
• Keys