There are a lot of costs included in a real estate purchase transaction. Different departments work diligently to make sure that your transaction is completed on time.
All these departments have fees that would be usually charged to the buyer at the end of closing.
One of such fees is called the escrow fee. In this post, we will understand what is escrow fees in detail.
Before we jump into escrow fees let’s first understand escrow and escrow accounts.
An escrow is a neutral third party who makes sure that all the terms that are in the agreed-upon contract are fulfilled before the transaction is complete. The escrow companies work for both seller and the buyer.
Once the sales contract is signed between the buyer and the seller, the escrow officer is responsible to take the earnest money deposit from the buyer and hold it in an escrow account.
Along with that, the escrow officer will ensure that all the conditions in the contract are met so that the transaction could be closed smoothly.
The escrow account is a temporary account created by the escrow company once the sales contract is signed between the seller and the buyer.
This account is used to hold funds that would be disbursed upon completion of the real estate transaction.
These funds will be disbursed only after all the conditions that are set up in the contract are settled.
After the initial sales contract is signed between the buyer and the seller, the buyer will give an earnest money deposit check to the escrow company which will be held in this escrow account.
The earnest money deposit check given by the buyer acts as a commitment to purchase the property.
Some common conditions in the contract are the buyer acquiring a mortgage and passing the property inspection.
A mortgage escrow account is when a borrower chooses to pay his homeowner’s insurance and property taxes every month along with his mortgage payments.
These payments are saved in an escrow account maintained by the lender. The borrower will pay the taxes and insurance amount monthly to the lender, and the lender will pay the taxes and insurance when they are due from the escrow account.
An escrow fee is a fee paid to the escrow company for providing escrow services that are determined by the property purchase price.
The job of the escrow company is to hold and disburse money to different parties involved in a real estate transaction, co-ordinating will all the parties involved in the signing of the documents, maintaining the accuracy of paperwork, make sure all the parties adhere to the contract and take the liability of holding funds in their position till the transaction is complete.
The escrow fees could be anywhere between one to two percent of the property purchase price.
For example, if you are planning to buy a property worth $300,000, the escrow fees would be anywhere between $3000 to $6000.
There is also a base fee charged for the escrow services. All things considered, the actual escrow fee could vary depending on the escrow company as there are no regulations for these fees and every company may charge different fees for their escrow service.
The escrow fees are subject to negotiation between the buyer and the seller through their respective realtors.
One of the common ways to go forward with paying the fees is to split the fees between buyer and seller.
Depending on the outcome of the negotiation, the escrow fees could be either paid by the buyer or by the seller through seller concession.
Escrow fees are one of the substantial costs in a real estate purchase transaction. The buyer and seller should have a basic idea about the cost of the escrow services.
Your real estate agent would be the best person to help you choose the escrow company that works diligently and provides the best escrow services in the market.
A new home purchase can be an intimidating process, as most of the borrowers may not be ready for it. One of the most confusing processes could be the escrow process also known as closing.
The escrow process starts when the seller accepts your offer to buy his house, and continues till you as a buyer receive the key to the house.
Before we go through the escrow process, we will understand what an escrow is. An escrow is an account held by a third party on behalf of the buyer and the seller till the time the property purchase transaction is completed successfully.
It is like a temporary saving account held by the third party till all the seller’s and buyer’s conditions are fulfilled.
The complete time frame for the escrow process timeline varies as it is based on many factors.
Some of the parameters that may determine the time it takes for closing are; mortgage pre-approval letter, timely procurement and submission of documents, and the time it takes for the mortgage underwriting process.
Just like the time frame taken for closing, the escrow process can also depend on the regulations imposed by the specific state. Below mentioned are the generic steps of the escrow process.
To open an escrow account you don’t have to do it personally.
Once you and the seller sign the purchase contract, the escrow agent will collect an EMD (earnest money deposit) check in the escrow account with the escrow company mentioned in the contract.
This company is a neutral third party. The job of this company is to collect the required funds and the docs in the property purchase transaction from the very first EMD till the closing docs are signed.
The next step in the escrow process is the property appraisal. Once the seller accepts the offer and the EMD is received, the lender will order for appraisals.
This is one of the most important steps in the process as it depends on appraisals if your process would move ahead or you have to cancel the agreement.
If the appraisal value comes less than the selling price in the contract, the lender will not proceed with the mortgage application.
If the appraised property value is less than the selling price quoted by the seller, you can ask the seller to reduce the price and create a new contract accordingly.
Or, get a second appraisal and hope it matches the sales price on the contract.
You must have received a pre-approval from your lender before signing the purchase contract.
Once the lender gets an update about the address and the sales contract, they will start the process of the loan application.
Initially, they will provide you with the initial loan estimate where all the loan parameters would be mentioned like; interest rate, closing cost, loan program, tenure, and loan amount.
There are a few things that you can negotiate and shop around for. Once you sign and accept the estimate, the lender will put your file for underwriting with the required documents.
Homeowners insurance is something that you have to keep paying till you own this property.
Hence it is imperative that you seek and shop around for adequate coverage for your house depending on the geographical location of the subject property.
A title report is generated by the title company to show if there are no claims or liens on the property that you are not aware of.
If the report is clear, then the lender will order title insurance as well. If there is any dispute or error in the report, it is the seller’s responsibility to clear the dispute or error.
The title insurance will help you protect your claim on the property legally if any claims for the property show’s up in the future which were not found while the initial title search.
This is the final step in the escrow process timeline. In this process, all the closing documents need to be signed between the buyer and the seller. Yes, the documents list could be huge.
However, it is worth the feeling of a property owner. The escrow officer will prepare all the documents including the deed with the buyer’s name as the new owner of the property and will send it to the county office for recording.
The buyer needs to arrange the funds for closing costs and down payment through a cashier’s check or wire transfer.
The best part is that you as a buyer don’t have to do anything in the entire escrow process timeline, accept for providing documents and making the payment for the EMD, down payment, and the closing costs.
Your real estate agent will be taking care of the rest of the things. However, it is important to understand the escrow process timeline as you would be prepared and know which step would be next.