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Understanding the Escrow (Closing) Process
1. What is an escrow?
Escrow is defined as a process where parties deposit instructions and funds with a "disinterested" third party until conditions of the instructions are met. This applies whether the purchase is real estate or an expensive Ebay item. In a real estate escrow, a title insurance company, escrow company or attorney will traditionally serve as the third party. They will oversee completion of the instructions (or purchase contract), ensure funds are paid to the seller and the title to the property is transferred to the buyer. In a refinance, your escrow closer will ensure that your previous mortgage company is paid off with the new loan proceeds.
2. How is an escrow started?
If you are working with a real estate agent, your agent will "open escrow" for you by depositing your earnest money check and the purchase contract with an escrow/title company or attorney. If you are purchasing a property without the help of a real estate expert, you will have to open the escrow yourself. For a refinance, ask your loan originator for assistance.
3. How will you hold title to the property?
Ways of holding title (such as sole and separate, joint tenancy, community property with right of suvivorship) vary by state. Most escrow/title companies can provide information on what applies for your state, but you may want to consult an attorney for legal advice for your particular situation. This is a decision you should make immediately along with exactly how you want your name to appear on all documents. Provide this information to your escrow expert as soon as possible as it allows them to prepare the documents correctly. If you decide later to change how you want to hold title or how your name should appear, these changes may delay your escrow closing.
4. What is title insurance?
Title insurance protects your investment by insuring you are the only one with a valid claim to that property. During the escrow period, a title company, abstractor or attorney will research historical records that pertain to the property you are buying or refinancing. After examining those records, a commitment for title insurance will be issued, indicating any items that must be cleared prior to closing. The commitment will be sent for your review. Contact your escrow/title officer or attorney if you have any questions about the commitment. You will receive your title insurance policy after the closing.
5. How is the escrow closed?
The escrow officer or attorney will make sure all contract instructions are met. They will monitor deadlines and compliance (such as for home inspection, loan approval, termite report, hazard insurance) and request payoff information for existing loans against the property. If you are the seller, you will sign documents to transfer the property to the buyer. If you are the buyer, you will bring required funds to the closing appointment, and sign loan documents and other legal papers. The seller's existing mortgages or other obligations will be paid off, the seller will receive any remaining proceeds, and the transfer of title to the buyer will be recorded at the courthouse. The escrow is then closed.
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