Mortgage Understanding the Escrow Process

Escrow is a financial instrument held by a third party on behalf of two other parties who are completing a transaction. It’s like a trust account held by a third party while all the seller and buyer’s obligations are fulfilled.

The time it takes to go from the beginning to the end of the escrow process varies. Some of the factors determining the length of the closing include a mortgage pre-approval, having the proper documents on hand, and the amount of time it takes to get the underwriting complete. And just like the length of time, the process can also vary by state. The steps, however, are generally the same for everyone.

Open an Escrow Account

Once you and the seller have signed a mutually acceptable purchase agreement, your agent will collect your earnest money check and deposit it in an escrow account at the escrow company specified in the purchase agreement.

The escrow company acts as a neutral third party to collect the required funds and documents involved in the closing process from the initial earnest money deposit and loan documents to the signed deed. In some areas, attorneys may handle this process instead of an escrow company and it may be called a settlement rather than an escrow.

Await the Bank’s Appraisal

The bank advancing the mortgage will do its own appraisal—which the buyer usually pays for—to protect its financial interests if it ever needs to foreclose on the property. If the appraisal comes in lower than the offered price, the lender will not give you financing unless you come up with the difference or the seller lowers the price to the appraised amount.

You can, however, try to change the appraiser’s mind by doing one of the following:

  • Provide additional information on why you believe the home should be appraised at a higher amount
  • Get a second appraisal
  • Try another lender and hope that appraisal comes out in your favor

If none of these options is possible, you can cancel the purchase contract.

Secure Financing

You should have already been pre-approved for a mortgage before your agreement was accepted. Once you give your lender the property address, they will prepare a good faith estimate—or a statement detailing your loan amount—interest rate, closing costs and other costs associated with the purchase. Be sure you negotiate the numbers on this document before you sign it. Once you have your written loan commitment, it’s time to remove the financing contingency in writing.

Approve the Seller’s Disclosures

You should receive written notification of any obvious problems that have already been identified by the seller or the seller’s agent. For example, in moderate- to low-income neighborhoods in high-cost-of-living areas, the garage may have been turned into a living area in violation of city housing codes. You may already be aware of any problems like these because they’re often mentioned in the listing.

The property may come with a no seller disclosure, meaning the seller is not releasing any details in the terms of sale. If you’re still interested in the property, have your own inspection done. Make sure you get permission from the seller before your inspector comes on to the premises.

Obtain the Necessary Inspections

The next step is to consider whether you want the added expense of inspections. While these aren’t required, they can come in handy considering your circumstances.

Although it’s not a requirement, it’s in your best interest to get a home inspection. For a few hundred dollars, a professional home inspector will tell you if there are any dangerous or costly defects in the home. If there are, you’ll want to know about them so you can do one of the following:

  • Back out of the purchase.
  • Ask the seller to fix them.
  • Ask the seller to lower the price so you can handle the repairs yourself.

Note that you cannot negotiate any seller concessions here if the contract says you will purchase the property “as is.” If the inspection process concludes satisfactorily, you will need to remove the inspection contingency in writing. You’ll repeat this step after any other inspections.

Pest Inspection

You may want to get a pest inspection to ensure the house does not have termites, carpenter ants, or other pests such as roaches or rats. These problems may not be apparent during the day when you’ve most likely viewed the house and would be a terribly unwelcome discovery after you move in. Any pest problems will need to be rectified before the sale can proceed—assuming you want to continue with the purchase. This is another area where you may want to renegotiate with the seller to pay for the work.

Environmental Inspection

It is sometimes recommended to get an environmental inspection to check for toxins in the home such as mold and asbestos. There can also be problems on the home site like contamination from a location near a landfill, former oil field, dry cleaner, gas station or other environmentally hazardous business. Any problems uncovered in this area can mean serious health hazards and may be expensive to fix.

Geologic Report

Areas subject to earthquakes may require a soils report and/or a geologic report to assess the risk of serious damage to the property in the event of such a disaster. You may also want to consider a flood report. If the home is too likely to flood, you won’t be able to get homeowners insurance, which means you can’t get a mortgage. In some cases, purchasing flood insurance in addition to your homeowner’s insurance will solve this problem. In rural areas, a land survey should be done to verify the boundaries of the property. In urban areas, the boundaries tend to already be very clear.

Hazard Insurance

This includes homeowners insurance and any extra coverage required in your geographic area (such as flood insurance). You will be required to have homeowners insurance until your mortgage is paid off. If you want to save a few bucks, choose your own insurance company and shop around to get the best rate. The one the bank selects may not be the one you want.

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