You‘ve finally found a house you‘d like to buy, and you’re in the final stretches of the homebuying journey. You keep hearing the terms “escrow” or “close of escrow“ pop up. But what do these terms mean and, most importantly, how do they play into buying a home?
Escrow occurs when two parties are engaged in a transaction, with a third party supporting that transaction. The word escrow implies a relevant asset is placed in custody until all conditions of the contract are met. For our purposes, there are three parties involved in this contract:
- The seller of the home.
- The homebuyer.
- The party in charge of custody who helps everyone fulfill their terms of the agreement.
The third party in escrow, usually an escrow agent, attorney or title company, holds your good faith deposit. The good faith deposit is money the buyer puts down to prove they’re serious about buying the seller’s home. In some cases, they hold any funds deposited by the seller, usually unpaid property taxes. Until both the buyer and seller complete everything necessary to make the transaction official, these payments, as well as any necessary documents, are kept in escrow.
Close of escrow
“Close of escrow” means that both buyer and seller have met the conditions in the homebuying contract and the third party that holds the documents and funds can move forward with the sale. At this point, the closing documents are signed, including title forms, the deed of trust and any other associated paperwork, and the home officially belongs to the new owner.
What does the escrow closing process look like?
Although everyone’s escrow closing process may look a bit different, here's how close of escrow typically fits into the homebuying journey:
- The buyer gets prequalified with a lender or bank and makes an offer on a property.
- The seller accepts the offer.
- The purchase agreement is signed, the buyer puts down the good faith deposit, and the buyer provides the sales contract to their lender to continue the mortgage application process.
- The deposit, and sometimes other assets like the title and deed, go into escrow with the escrow agent.
- The buyer is conditionally approved for the mortgage and the home appraisal and inspection take place. A home appraisal helps determine the value of the home and can help with negotiations with the seller. The home inspection, typically paid for by the buyer, helps the buyer flag any repairs or issues with the seller.
- The buyer receives final approval from their lender or bank to close and all parties thoroughly review and sign any necessary documents, usually related to your mortgage and deed.
- Buyer completes a final walk-through of the house.
- Once the escrow agent receives everything necessary — congratulations! The escrow process is complete.
Is my closing date and closing of escrow the same thing?
No, not necessarily. Your closing date and closing of escrow can differ. This mainly depends on the title transfer. If the buyer and seller have both completed their agreements, but the title transfer hasn’t taken place, then the official closing will occur after close of escrow on a separate date. Should the buyer receive the title at the time of close of escrow, then the closing date and close of escrow may fall on the same date.
How long does it take to close escrow?
Close of escrow may take anywhere from 30 to 60 days depending on factors like inspections, missing paperwork or issues with the title. For example, if there is a lien on the property, the transaction may be stalled until this is resolved.
What prevents or delays close of escrow?
In any contract, there’s a possibility for hiccups along the way. Some may prevent or delay close of escrow. For example, the home appraisal required for mortgage approval is delayed or you find something of note during the home inspection. Some transactions may also be delayed because a certain contingency in the agreement isn’t met.
What we’ve learned
- Escrow is a legal contract that involves custody of an asset until all conditions are met.
- Once all conditions are met by both the buyer and the seller, escrow is closed.
- Closing of escrow can differ from your closing date.
- There are situations that could delay or prevent closing escrow.
Closing of escrow is a required part of the homebuying process. It helps both the buyer and the seller make a legally protected transaction.