Understanding The Escrow Process
Escrow, Home Appraisal, Home Inspection, Title Insurance, Home Protection Plan FAQ
Escrow is an impartial, unbiased third party working for buyer and seller. Escrow holds funds and documents on behalf of the buyers and sellers and distributes them according to buyer and seller instructions.
To start the process, the agent (usually the listing agent) delivers to the escrow officer such items as, but not limited to, buyer’s deposit check, details contained in the Residential Purchase Agreement, buyer and seller addresses and phone numbers, and information regarding the buyer’s lender.
The escrow officer then prepares escrow instructions to be signed by buyer and seller. Escrow instructions reiterate the Residential Purchase Agreement and also contain information pertaining to the escrow process. The escrow is formally opened when both buyer and seller return signed escrow instructions to the escrow officer.
During the escrow, everybody has a job to do. Below, each party’s responsibilities are outlined:
Assists his/her client in completing all of his/her responsibilities.
Delivers grant deed to escrow. Delivers clear termite inspection to escrow. Delivers information on the current mortgage holder to escrow. Delivers information on home protection (if any). Delivers any bills to be paid out of escrow to escrow. Fulfills any other obligations required by the Residential Purchase Agreement.
Deposits earnest money, down payment, and money to cover closing costs to escrow. Approves any documents outlined in the Residential Purchase Agreement. Fulfills any other obligations required by the Residential Purchase Agreement.
Prepares preliminary title report. Arranges for and picks up loan funds. Delivers deeds to county recorder’s office. Writes title policy. Confirms recording of deeds. Makes payoff to lender on seller’s mortgage. Sends remaining proceeds to escrow (minus title fees). Sends title policy to insured.
Delivers loan documents to escrow for buyers to sign. Delivers funds for the buyer’s loan to the title company.
Opens the order for title insurance. Obtains approval from the buyer on the preliminary title report, termite inspection, and any other items required by the Residential Purchase Agreement. Has buyer sign loan documents. Delivers loan documents to the lender. Receives funds from the buyer and lender. Pays buyer and seller bills as outlined in the escrow instructions. Prorates taxes, association dues, rents, etc. Prepares a final statement (closing statement) for buyer and seller. This statement specifies amounts paid out of buyer and seller accounts. Records grant deed and trust deed and disburses funds. Delivers closing statements to the agents and/or buyers and sellers.
The escrow is closed after terms and conditions of the escrow instructions have been completed and deeds have been recorded.
APPRAISAL OF YOUR HOME
Your lender will require an appraisal of your new home before approving your loan. The appraisal determines the maximum loan amount that the lender will make on the property.
The appraiser will use the market comparison approach to establish an opinion of value. The market comparison approach uses recent sales in the same neighborhood and compares location, condition, and amenities to establish approximate value.
The appraisal is usually a condition of the Residential Purchase Agreement because lenders limit the amount that they will loan based on the loan-to-value ratio. Loan-to-value ratio is defined as the relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value. For example, if a home is appraised at $300,000, and the lender will lend 80% loan-to-value (LTV), the loan amount cannot exceed $240,000.
When a home is appraised for more than the purchase price, the lender will only make a loan based on the purchase price. When a home is appraised for less than the purchase price, the lender will only make a loan based on the appraisal amount.
If the appraisal comes in below the purchase price, there are five possible solutions:
1) Increase the down payment
The down payment amount can be increased.
2) Reduce the sales price
The sales price can be reduced to the appraised price.
3) A combination of 1 and 2
Increase the down payment and reduce the sales price.
4) Obtain another appraisal
You can obtain another appraisal.
5) Obtain a loan with a higher LTV
If you were not originally applying for a loan with the maximum loan-to-value, the LTV can be increased.
Since the appraisal is for the purpose of determining the amount that the lender will lend, most sellers will not reduce a sales price that has already been established when the appraisal comes in lower than the sales price.
1) Accept the offer
If the offer is accepted, escrow is opened.
2) Reject the offer
If the seller rejects your offer, the seller does not wish to negotiate any further. In this case, it is usually time to look for another home.
3) Counter the offer
If the seller counters the offer, your options are the same as the seller’s options were–to accept the counteroffer, to reject the counteroffer, or to counter the counteroffer.
THE INSPECTION PROCESS
It is very important that you have a professional inspection conducted on your new home. The physical condition of the land and improvements are not guaranteed by either the sellers or brokers, except as specifically set forth in the Residential Purchase Agreement. For this reason, you should personally conduct a thorough inspection with a professional who should provide a written report. If the inspector suggests further inspections, tests, and/or investigations, you should conduct these using professionals who are qualified to do so.
The law requires the sellers and brokers to disclose to a buyer all material facts known to them which affect the value or desirability of the property. In most cases, brokers are required to make a visual inspection of the property and disclose anything to you that would affect value or desirability.
You select the inspector. Recommendations are available upon request. Recommendations will be based on past performance but cannot be guaranteed. Also, you should not select an inspector based on price. The qualifications should be the determining factor.
UNDERSTANDING TITLE INSURANCE
Title companies, unlike most insurance companies, operate under the theory of risk elimination. Most of the premium for title insurance is used to prevent problems, as opposed to most insurance companies, which allocate most of their premiums to settle claims once a problem arises.
Title companies store and maintain records that affect title. This is done in the “Title Plant”. Many title companies’ records date back over one hundred years.
This allows them to anticipate and eliminate potential problems with title transfers. They determine what encumbrances (claims or liens) are on your title. The title company works to clear encumbrances which buyers do not customarily assume before the close of escrow. The title company conducts a thorough search of public records to eliminate most of the risks against a future claim. When a claim is filed, the title company handles it according to the terms of the title insurance policy.
Title companies are required to file their rates with the California Department of Insurance. Rates and service vary from company to company. Buyer and seller choose services; however, referrals can be provided upon request. Referrals are based on price, service, strength of the company, and past performance.
THE HOME PROTECTION PLAN
A home protection plan is an insurance policy that covers many of the major systems in the home for the duration of the coverage period.
The election of coverage is made when you complete the Residential Purchase Agreement. The coverage starts upon payment at close of escrow and continues for one year. At the end of one year, you may renew if you wish. Either buyer or seller may pay for the original policy. In most cases, the seller pays for the policy.
When you need service, you call a toll-free number. A qualified technician is sent to your home and will make the repair or replacement. The home protection company pays for the repair; you pay a minimal service charge. There is also one more advantage– the work is guaranteed.
A home protection plan is almost always a very good idea. You have a large investment in your home, and there are many unknowns that can lead to costly repairs.
The home protection policy includes items covered in the policy that appeared to be functioning properly at the start of coverage. Items needing repair or replacement that the buyer or seller had knowledge of before coverage began are not covered. For specific coverage, read the policy.
Obtaining a home protection policy is integral to what is known as the “triangle of protection.” The “triangle of protection” includes the following:
1) Transfer Disclosure Statement
Sellers usually complete this form within five days after the acceptance of the Residential Purchase Agreement. It details what fixtures are included in the sale. It also requires the seller and agents to disclose any material fact that affects value or desirability.
2) Professional Inspection
This inspection is usually completed within ten days of acceptance of the Residential Purchase Agreement.
3) Home Protection Plan
This policy takes effect at the close of escrow.
As you can see, the home protection plan does not take the place of a professional inspection. With the “triangle of protection”, the seller and agents disclose anything that they know of that affects value or desirability. Then, a professional inspection is conducted to find any adverse conditions not previously disclosed. Finally, a home protection plan covers items that require repair or replacement after the closing of escrow. By obtaining the “triangle of protection”, you are reducing your chances of having problems after escrow closes.
The walk-through inspection is usually done about five days before the close of escrow. We meet at the property and follow the following procedure:
Unless you purchased the home “as is”, we most likely submitted a list of repair requests to the seller. We verify that all repairs or replacements were completed.
Demonstration of equipment
The seller will demonstrate how to operate equipment such as pool, spa, sprinklers, alarm system, appliances, or any other items that you have questions on concerning their proper operation.
Set up utilities
You will be provided with a list of all the utility numbers, and we will discuss with the seller the coordination of switching over the various utility services. We will review basic procedures such as leaving the trash out on the scheduled pick-up day.
We will plan the transfer of keys and finalize the possession time and date.
Items to be left at the home
We will discuss where the seller will leave such items as garage door openers, extra keys, instruction books, alarm codes, safe combinations, etc.
Change of address
You will be provided with a change of address card to be filed with the post office.
Home protection plan
If a home protection plan was purchased, you will be provided with information pertaining to the policy, along with a service number to call should you need service.
Review closing procedure.
We will discuss any remaining tasks that need to be completed before the close of escrow.
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