If you’re refinancing your mortgage or buying or selling a home, there are a lot of dedicated professionals working on your behalf. But perhaps none is more important than your escrow company, which has an invaluable role in protecting all parties and making sure the deal progresses and then closes as it should. Here are 8 common questions about the escrow:
1. What is escrow?
When you refinance your loan or buy or sell a home, a neutral third part acts on the behalf of all parties to ensure everything goes correctly, and that the deal closes properly only when all parties have performed as expected. Called ‘escrow,’ it’s a service that provides protection in the handling of all funds and documents for buyers, sellers, lenders and borrowers. The legal definition, use, and parameters of escrow in the state of California are dictated by The California Escrow Law, Section 17003 of the Financial Code.
2. Why is escrow so important?
Imagine a complicated transaction involving the exchange of money (down payment funds,) land (the real estate,) a loan, and also a transfer of legal ownership (title). That’s a lot of moving parts and a lot of people to please! Without escrow, who would hold that down payment, make sure things move when they are supposed to, documents are correct, and everyone upholds their part of the transaction before it legally becomes official? Lucky for us, that’s why escrow is in place, providing protection and mitigating risk for all principals (buyers, sellers and lenders.) Since escrow companies and escrow agents are neutral third parties, there is no conflict of interest or worry that they are favoring one party over another.
3. What services will escrow provide?
Any good escrow company will help their clients with these services to ensure loans and real estate transactions close correctly and as planned:
- Deposit and disburse funds
- Process and coordinate the flow of documents and funds
- Keep all parties informed of progress to the escrow
- Respond to the lender’s requirements
- Coordinate the signing of loan/closing documents
- Prorate and adjust insurance, taxes, rents, etc.
- Record the deed and loan documents
- Prepare a final statement outlining funds received and to be disbursed in the transaction
4. Is there a fee for escrow services?
There is a fee for escrow services, usually based on the size, complexity, service performed, and liability assumed. But escrow fees are usually nominal compared to the other costs in a real estate transaction and can even be characterized as low considering the valuable service and peace of mind they provide. Additional services like using a mobile notary for loan or closing document signings may be add-ons to the standard escrow fees. Your escrow fees will all be listed on your Good Faith Estimate, Closing Statement, and you can always request them from escrow directly.
5. Who pays the escrow fee?
There is no law or set rule that says one party or another is required to pay the escrow fee, but in practice, the buyer and seller often split the escrow fee 50/50 in most counties in California. However, there are a good number of counties, like Alameda, Contra Costa, Marin, San Francisco, etc., where the buyer pays the escrow fee, and in an equal number of others, including Sacramento, San Diego, and Los Angeles, the seller pays. When you write (or receive) a real estate purchase offer, it will be clearly documented whom is expected to pay the escrow fee, though it is negotiable.
6. Who chooses the escrow company?
It’s usually documented on the purchase offer which party gets to choose their escrow company, and their company of choice. But just like the assignment of the escrow fee, that’s all negotiable. Of course it’s important to use a reputable, experienced, and capable escrow company with a local presence, but the principal that didn’t choose the escrow company needn’t worry; no matter who choose them or are paying their fee, escrow companies are neutral third-parties and are strictly prohibited from taking or giving any referral fees or any sort of preferential treatment.
7. Are title and escrow different?
Often times, the term “Title & Escrow” treats these two separate functions as one, but in fact they are autonomous services. However, in many places, both the title and escrow process are handled by one title company, but in other areas, they are two separate entities. In the Sacramento area, title companies include executing all escrow functions so it makes it easy. Either way, an escrow company will make sure that everything is correct – including the details of a title conveyance, title insurance, etc. before allowing the transaction to close and record.
Remember that stand-alone escrow companies may have other clients and business outside of real estate transactions.
8. What’s the best part of an escrow officer’s day?
After all closing documents are signed, sent off to the lender for acceptance, title to the home changes hands and the deal official once it records with the county clerk. At that point, the escrow officer can call the real estate agents, buyers, and sellers with the great news, “We’re on record!” At that point, the buyer and seller exchange keys and the house officially belong to the new buyer! Buying or selling a home takes a lot of time, work, and can often be a little stressful or overwhelming, but when you hear your friendly and professional escrow officer say those words, it will all be worth it!
If you have any questions about the escrow process or any part of a mortgage transaction, or are thinking of starting your search to buy a home, please contact us!
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