The Switzerland Of The Transaction
Your guide to what goes into an escrow and how to successfully close one.
If your agent says it is time to open escrow, are you like, “huh”?
Of the real estate terms you’ve heard most, escrow is likely at the top of the list. Once you’ve successfully negotiated the purchase price and entered into a contract, the next step is to open escrow. Think of escrow as the Switzerland of the transaction it’s a neutral third party who takes in the buyer’s money and deposits to the seller at the end.
The buyer and buyer’s agent traditionally choose which escrow company will follow you through to the close of your transaction. The escrow company acts as a hub for buyers, sellers, and lenders to deposit money into and disburse money out of. The escrow holder has the obligation to safeguard the funds and documents throughout the escrow period, and to disburse funds and convey title only when all provisions of the escrow have been met.
For the standard residential purchase agreements in the state of California (AKA your offer), 3 percent of the purchase price is what’s known as your earnest money deposit (AKA your deposit). Your deposit shows the seller you are a committed buyer and willing to put some skin in the game. Assuming all goes well in negotiations, your 3 percent deposit that is due within three days of acceptance of your offer, will be held in escrow and eventually credited towards down payment and/or closing costs at the close of escrow.
The escrow timeframe varies with every transaction and can range anywhere from 10 to 90 days. Did you read that right? 10 days? SAY†WHAT†. If you’re wondering which factors go into determining a timeframe for an escrow period, allow me to explain.
If your purchase will be an all cash deal (and no, this doesn’t mean you show up at the escrow office with duffle bags of cash), and there are no conditions — such as appraisal and loan contingencies — to be met from the lender, you remove one of the most time consuming parts of every purchase and can have an escrow close as quickly as ten days.
For the buyers who will be acquiring a loan to purchase their property, your escrow timeframe is largely up to your lender. There are multiple factors that lead up to the lender eventually dispersing the funds to you. One of those steps is whether the appraisal comes in at value — discussed in last month’s article. The numerous guidelines to be met when working with a lender, and the timeframes that must be strictly adhered to, often result in a 45 day escrow.
Up until recently, a 30day close was standard practice. Most lenders can still pull that off, but believe it is safer to plan for 45 days. The biggest reason for the extended escrow period is because of something called TILA/RESPA Integrated Disclosure rule (gulp), AKA TRID. I recommend a search on TRID and why it is important to the home lending process. It certainly shook up the mortgage industry when it went into effect in October, 2015.
In March, I had what’s called a delay of escrow with a client, in which our 30day escrow turned into a 90 day escrow. But why?
My buyer took all the right steps; she was preapproved, she found the right house, and we submitted a winning offer. Finances were lined up and we were set to close on day 30 of our escrow timeline. A few days before close, the lender did a credit check to ensure nothing had changed that would cause delays in funding. That’s when the lender noticed our buyer had recently purchased a new car with a loan from the bank. Because of this financial setback, we had to ask the seller to extend our escrow for an additional 60 days. Luckily, the seller graciously accepted our request and my buyer is now happily in her home.
Often times, once you have found the house you love, you are ready to get in. The escrow might seem like a troublesome speed bump, but you’ll get through the escrow period in no time and the house will be yours!