Buying a Home: Go Through the Escrow Process
Once you’re in escrow, you’re in the home stretch – but what a long stretch it is. The days until you get the keys to your new home can’t go by quickly enough. Yet, at the same time, you’re so busy doing everything that needs to happen to close that it feels like there aren’t enough hours in the day. Here’s a general overview of what to expect during this stage. (Also, find out what can go wrong in 10 Hurdles to Closing on a New Home.)
The escrow company acts as a neutral third party between the buyer and seller, and makes sure all the required steps toward closing are completed correctly and on time.
For example, you wouldn’t want to just give your earnest money check to the sellers — what guarantee would you have that they wouldn’t steal it from you and refuse to sell you the house? Escrow companies prevent such scenarios.
The escrow company will handle all of the money that changes hands between you and the seller. It will also make sure all the documents required to seal the deal are completed correctly and on time.
The order of the steps will vary somewhat with each transaction, but the basic steps are almost always the same. (To learn more, read Understanding the Escrow Process.)
The lender will hire an appraiser to ascertain the home’s value. You may have to write a check for the appraisal up front rather than waiting until closing to pay the fee. This is because the appraisal will occur no matter what, but not all home-buying transactions make it to the closing table.
The appraisal protects the lender from lending you more money than the home is worth. Why does the lender care? Because in a worst-case scenario, it will end up repossessing the property because you stopped paying your mortgage and it will have to sell it to get back the money it lent you.
If the value the appraiser assigns to the home is lower than the purchase price, the seller will have to agree to adjust the price downward or you will have to pay cash for the difference. Otherwise, the transaction will fall through. And yes, even though the appraisal protects the lender, you’ll still have to pay for it, because you’re the one who is buying the home. The appraisal can also help you, though, by letting you know if you might be overpaying. If the appraisal results require the seller to drop the price by even a few hundred dollars, you’ll at least break even.
Secure Your Financing
If you followed the advice in chapter 6 of this tutorial, your financing should already be secure, but the lender may ask you for more paperwork while you’re in escrow if the loan underwriter requests it. And it never hurts to be proactive and ask the lender if anything else is needed to secure the loan. Being proactive may prevent delays later on.
Obviously, you don’t want to release your financing contingency until you’re 99.9% sure your loan will fund. Otherwise you could lose your earnest money deposit (often several thousand dollars) and possibly be subject to other damages, depending on the terms of the purchase agreement.
This one is also required by the bank for the bank’s benefit, the idea being that if you buy a home and later discover that it’s termite ridden, you might just walk away if you can’t afford to pay for the repairs. If the house has suffered significant structural damage from the termites, the bank will have trouble finding a new buyer. Pest inspections are inexpensive, though (often under $100) and protect you, too – you don’t want to buy a home with an active infestation of wood-destroying insects, do you? If the inspection reveals any problems with wood-destroying insects, the homeowner will have them remedied because otherwise they won’t be able to sell the home to you or anyone else.
This inspection is technically optional (meaning that the lender doesn’t require you to get one, and you can choose your own inspector), but you should consider it a requirement because it’s so important. (To learn more, read Do You Need a Home Inspection?)
A home inspector will examine the readily visible components of your home looking for problems that your untrained, first-time-home buyer’s eye probably would never catch. Did you know that the wall attaching the garage to your house is supposed to have a certain fire rating — or what a fire rating even is? Do you know how to tell if the roof is likely to leak? Do you know how to test the home’s water pressure to check for possible problems with the plumbing?
A home inspection can protect you against nasty, expensive surprises later on and sometimes give you some bargaining power to get the seller to lower the price if anything major needs to be fixed. In some cases, the inspection might reveal that you’re better off getting the seller to make the repairs or even walking away from the home rather than dealing with all of its problems. In other cases, a home inspection will give you the peace of mind of knowing that you’re purchasing a sound structure that probably won’t be a major headache or money pit. Home inspections can miss big things if they’re hidden behind walls or if the home inspector isn’t very good. But they’re still your best form of protection against unforeseen problems.
If you're in a part of the country that has problems with radon gas seeping into basements, it's also worth checking that out (the Environmental Protection Agency's radon guide can help). And don't forget to locate the oil tank, if the house is (or was) heated by oil and make sure it isn't buried.
If the home inspection reveals any potential major problems, you may decide to have some secondary inspections done. While home inspectors can be great at pointing out problems, they are often generalists, not specialists. And even if they do have expertise in one area, such as plumbing, they won’t have it in every area that matters (plumbing, electrical, roofing and so on). If the home inspector identifies a possible problem, they might recommend that you have a more specialized professional examine the item further before proceeding with the transaction. Expect to pay a few hundred dollars for each inspection (but remember that you’re trying to identify major problems that could cost thousands of dollars to fix).
This document will be acquired on your behalf – you don’t have to do anything – and it will tell you things like whether your home is in an airport noise zone, a flood zone, or anything else that could present a significant danger or nuisance to you as a homeowner in that location. If the home is in any hazard areas, the lender may require that you purchase additional insurance (flood insurance is a common one).
Review the Seller’s Disclosures
The seller and the seller’s agent are legally required to disclose any known problems with the home. They may have to fill out a detailed questionnaire asking them to specifically comment on the condition of various components of the home. However, if the owner is the bank (which will be the case if you’re buying a foreclosure), it will be able to get out of this part of the deal because it can’t be expected to have any prior knowledge of the home’s condition.
Avoid Title Trouble
Your lender will order a title search and title insurance. A title search checks to make sure there are no claims to the property other than the current owner’s, such as a tax lien. You want to own the property free and clear, and a title report will make sure that can happen. If there are any clouds on the title, as title problems are called, they can (and must) be resolved while you’re under the protection of the escrow process in order for the transaction to go through. Title insurance protects both you and the lender against any future false claims to the property, such as someone pretending to be an heir of one of the property’s previous owners.
If You're Buying a Co-op Apartment
If you're buying a co-op apartment rather than a condo, this is also the stage at which your financials will be inspected by the board of the cooperative. If you pass the first stage, you will be invited for a personal interview with board members. At the end of this process, you may be accepted or rejected by the board. Buyers (and sellers, for that matter) have very little recourse against the actions of co-op boards.
Be sure to plan for this stage – and the possibility that you (or your buyer) could be rejected – in timing any move that involves purchasing (or selling) a co-op apartment. Avoiding the board process is one reason why New York City condos generally command higher prices than co-op apartments of the same size and level of luxury. On the other side, stringent standards were a reason that co-ops tended to survive the 2008 housing crash better than many other segments of the housing market.
Conduct a Final Walkthrough
Just before closing, you and your agent will revisit the home to make sure no damage has occurred while the home has been in escrow. If it has, you’ll want to make sure it’s fixed before you take possession.
One part of the escrow process is so important that it deserves its own section – getting insured. We’ll discuss this next.Buying a Home: Get Properly Insured