Understanding The Escrow Process

Escrow, Home Appraisal, Home Inspection, Title Insurance, and Home Protection Plan FAQ

What Is Escrow?

An escrow acts as a neutral third party that serves both buyer and seller. It securely holds funds and documents, then distributes them based on the buyer’s and seller’s instructions.

Starting the Escrow Process

To initiate escrow, the listing agent typically delivers key items to the escrow officer. These include the buyer’s deposit check, details from the Residential Purchase Agreement, contact information for both parties, and the buyer’s lender details.

Next, the escrow officer drafts instructions for the buyer and seller to sign. These instructions summarize the Residential Purchase Agreement and outline the escrow process. Once both parties sign and return the instructions, the escrow officially begins.

Roles and Responsibilities During Escrow

During escrow, each party has specific tasks. Here’s a breakdown of their responsibilities:

Agent

The agent guides their client through all required tasks, ensuring a smooth process.

Seller

The seller provides the grant deed, a clear termite inspection report, current mortgage details, home protection plan information (if applicable), and any bills payable from escrow. Additionally, they fulfill all obligations in the Residential Purchase Agreement.

Buyer

The buyer deposits earnest money, down payment, and closing costs. They review and approve documents outlined in the Residential Purchase Agreement and meet any additional requirements.

Title Company

The title company prepares a preliminary title report, secures loan funds, delivers deeds to the county recorder’s office, writes the title policy, confirms deed recording, pays off the seller’s mortgage, and sends remaining proceeds to escrow after deducting fees.

Lender

The lender provides loan documents for the buyer to sign and transfers loan funds to the title company.

Escrow Holder

The escrow holder orders title insurance, secures buyer approval for the preliminary title report, termite inspection, and other required items. They facilitate the signing of loan documents, collect funds from the buyer and lender, pay bills as outlined, prorate taxes and dues, prepare a final closing statement, record deeds, and disburse funds. Finally, they deliver closing statements to agents, buyers, and sellers.

Once all terms and conditions are met and deeds are recorded, the escrow closes.

Home Appraisal

Why Appraisals Matter

Before approving a loan, the lender requires an appraisal to determine the property’s value and set the maximum loan amount.

How Appraisals Work

The appraiser uses a market comparison approach, analyzing recent sales in the neighborhood. They compare location, condition, and amenities to estimate the property’s value.

Since the appraisal often serves as a condition of the Residential Purchase Agreement, lenders base the loan amount on the loan-to-value (LTV) ratio. For instance, if a home appraises at $300,000 with an 80% LTV, the lender caps the loan at $240,000.

Appraisal vs. Purchase Price

If the appraisal exceeds the purchase price, the lender bases the loan on the purchase price. Conversely, if the appraisal falls below the purchase price, the lender uses the appraised value.

Handling a Low Appraisal

If the appraisal comes in below the purchase price, consider these five solutions:

1) Increase Your Down Payment

Boost your down payment to cover the gap.

2) Negotiate a Lower Sales Price

Request the seller to reduce the price to match the appraisal.

3) Combine Options 1 and 2

Increase your down payment and negotiate a reduced sales price.

4) Request a New Appraisal

Obtain a second appraisal to challenge the first.

5) Seek a Higher LTV Loan

Apply for a loan with a higher loan-to-value ratio, if available.

However, most sellers hesitate to lower the sales price after a low appraisal, as the appraisal primarily affects the lender’s loan amount.

Responding to Offers

When responding to an offer, you have three options:

1) Accept the Offer

Accepting the offer opens escrow.

2) Reject the Offer

Rejecting the offer ends negotiations, prompting you to explore other properties.

3) Counter the Offer

Countering the offer allows further negotiation, where you can accept, reject, or counter again.

Home Inspection Process

Why Inspections Are Crucial

Conducting a professional inspection ensures you understand your home’s condition. Neither sellers nor brokers guarantee the property’s physical condition unless specified in the Residential Purchase Agreement. Therefore, hire a qualified inspector to provide a detailed written report.

If the inspector recommends further tests, hire specialists to conduct them. Sellers and brokers must disclose known material facts affecting the property’s value or desirability. Brokers typically perform a visual inspection and report any issues.

Choosing an Inspector

Select your inspector carefully, prioritizing qualifications over cost. Recommendations are available, but their performance isn’t guaranteed.

Understanding Title Insurance

How Title Insurance Works

Unlike typical insurance, title companies focus on risk elimination. They allocate most of their premium to prevent title issues rather than settling claims.

Title Company Responsibilities

Title companies maintain extensive records in a “Title Plant,” often spanning over a century. They search public records to identify and clear encumbrances, ensuring a clean title transfer. If a claim arises, they handle it per the policy terms.

Choosing a Title Company

Title companies file rates with the California Department of Insurance, but services and fees vary. Buyers and sellers can choose their provider, and referrals are available based on price, service, and reliability.

Home Protection Plan

What Is a Home Protection Plan?

A home protection plan insures major home systems for one year, starting at the close of escrow. Either the buyer or seller may pay for the policy, though sellers typically cover it. You can renew the policy annually.

How It Works

When service is needed, call a toll-free number to dispatch a qualified technician. The plan covers repair costs, with you paying a small service fee. All work is guaranteed.

Benefits of a Home Protection Plan

Given your significant investment, a home protection plan safeguards against unexpected repair costs. It covers systems functioning at the start of coverage but excludes known issues. Review the policy for specific coverage details.

The Triangle of Protection

The home protection plan forms part of the “triangle of protection,” which includes:

1) Transfer Disclosure Statement

Within five days of agreement acceptance, sellers complete this form, listing fixtures and disclosing material facts affecting value.

2) Professional Inspection

Completed within ten days of agreement acceptance, this inspection identifies undisclosed issues.

3) Home Protection Plan

Effective at escrow closing, this plan covers post-closing repairs.

Together, these steps minimize risks by ensuring disclosures, inspections, and coverage for future repairs.

Walk-Through Inspection

Conducting the Walk-Through

Approximately five days before escrow closes, we conduct a walk-through to:

Verify Repairs

Unless purchased “as is,” we confirm the seller completed requested repairs.

Demonstrate Equipment

The seller shows how to operate equipment like pools, sprinklers, or alarms.

Set Up Utilities

We provide utility contact information and coordinate service transfers with the seller.

Coordinate Possession

We arrange key transfers and finalize possession details.

Review Items Left at the Home

We confirm where the seller will leave items like garage door openers or manuals.

Change of Address

We provide a change of address card for the post office.

Home Protection Plan Details

If purchased, we provide policy details and service contact information.

Review Closing Steps

We discuss any remaining tasks to finalize escrow.

Resources for a Smooth Home Buying Process