Closing Escrow – The Process Explained

Closing escrowWhen you buy a pack of gum at the grocery store, there’s a point in time where the gum becomes yours and the money becomes theirs. Usually, they hand you a pack of gum, you hand them some money, and the deal is done. The process in closing escrow, while in many orders of magnitude more complex when you’re buying a house, but the concept is still the same.

First of all, you don’t grab a house off the shelf and carry it up to the title office when you go to finalize the purchase. There’s no bar code. Instead, there’s a “title”, which is a piece of paper issued by a local government (typically a county) that represents the property. It has several descriptors on it, including the property’s location, its size, and who owns it. The closing process is where the title changes hands. A new owner is filed with the local government, and a new title is drafted and given to you, the proud new owner.

At the same time title changes hands from seller to buyer, a mortgage, or “deed of trust” is typically issued by the borrower to the lender. If the buyer is paying cash for the property and needs no loan, this step–and many others–becomes irrelevant, and closing costs will be considerably lower.

Closing escrow is done at a title office, where a settlement agent facilitates the paperwork and all the signatures. If you don’t know a settlement agent, feel free to shop around. Your real estate agent or lender will also be happy to recommend one. Depending on where you live, the settlement agent will be either a title agency employee, an attorney, or a dedicated escrow company. Whichever is preparing your documents, the process and result are likely to be very much the same.

The buyer will need to pay a number of fees associated with all the complexities that go in to purchasing a home. These fees are called ‘closing costs‘, and include loan processing fees, underwriting fees, appraisal fees, inspections, insurance, and a number of other verifications that have to do with buying a property. Back when you submitted your loan application, the lender will have given you a good faith estimate about what those costs would be. The day before you go to close, they’ll compile your actual closing costs. If there’s a small difference in the prices, that’s life–what they provided was just an estimate, and often unforeseen events come up that require extra investigation. If there’s a huge difference and you feel they’re doing you a dirty, feel free to bail on that lender and go shop another loan.

Learn more about closing costs

When you made your purchase offer to the seller, it’s also possible you paid earnest money. This is a token of good faith, reinforcing that you’re truly interested in buying the house, and giving the seller some reassurance that they can stop entertaining other offers. That earnest money is put in an “escrow account”, a midpoint between buyer and seller, serviced by the settlement agent. If the loan goes through as planned, money will be moved from the escrow account to the seller and other participants in the process. Based on the buyer’s offer and the seller’s acceptance terms, if the deal doesn’t go through, the earnest money will be given back to the buyer.

Prior to closing, a title professional will research the property in question, to make sure the home is actually available to sell, and that are no outstanding liens. A lien is the first right to funds from a sale–if there is an existing mortgage, unpaid taxes, or a judgment against the seller, the title professional will make arrangements for lien holders to get paid first when the property sells.

Once title has been researched and all necessary inspections have been made, a HUD-1 statement is issued by the settlement agent that breaks down exact closing costs to both buyer and seller. As a rule, buyers are responsible for paying closing costs. With VA loans, however, the seller pays part; additionally, if the market is favorable, buyers can also sometimes negotiate for the seller to pay all or part of the closing costs.

Check out a HUD-1 to get an idea of typical closing costs

At closing time, the buyer and seller will go to the title office (not necessarily at the same time) and sign the huge stack of documents,  prepared by the settlement agent. The buyer might bring a cashier’s check for the down payment; the lender will wire the rest of the purchase amount into the escrow account, and everything will be teed up to change hands. When all the documents are signed, title is effectively transferred from seller to buyer. You can now go home and sit tight.

Work for the settlement agent continues after the papers are signed. In the concept of closing cost, they wrap up the transaction by sending money from the escrow account into the seller’s account, or dividing it up between creditors and lien holders, if there were any. They’ll also need to pay inspectors, appraisers, and anyone else who helped out with preparing the sale. And of course, they’ll need to register the transaction with the local government, so the public record can accurately state who owns the property.

Generally several hours after the documents are signed, the buyer will receive the go-ahead to occupy the property, even though they probably took the key with them when they left the title office. Technically, if they open the door before the transaction is finalized, they’re trespassing, though sellers will rarely know or care. But because the process is so long, involved, and expensive, it’s best to do everything by the book to avoid screwing things up.

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AMCAP Mortgage LTD. – NMLS# 129122
9999 Bellaire Boulevard, Suite 700 Houston, Texas 77036
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