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8 Essential Steps to Navigating Escrow in Home Buying

By Jamie Richardson | July 1, 2023

Navigating the escrow process is a critical aspect of home buying, ensuring a secure and smooth transaction for both buyers and sellers. Escrow acts as a neutral third party that holds funds and documents until all conditions of the home purchase are met. 

Selling your home can be a bumpy journey. Even after a contract is established between you and the buyer, deals may fall through unexpectedly.

The National Association of Realtors (NAR) conducted a survey in October 2022, revealing that approximately 7% of deals in the preceding three months got terminated before reaching the closing stage. In other words, while it is uncommon for buyers to back out of a deal, it does occur on occasion.

Understanding the essential steps involved in escrow is vital for buyers to successfully navigate the process. In this article, we will explore the eight essential steps involved in escrow when buying a home.

Step 1: Initiating the Transaction

Learning about escrow and initiating the process is an important step that occurs once the buyer and seller have agreed upon the terms of the home purchase. Escrow serves as a safeguard for both parties, ensuring a fair and secure transaction. 

During this stage, the buyer, seller, or their respective agents select an escrow agent who will oversee the process. The escrow agent acts as a neutral intermediary, holding funds and important documents until all conditions are fulfilled. 

Buyers and sellers must provide initial documentation, such as the purchase agreement and relevant financial information, to the escrow agent, who will initiate the formal escrow process. This step sets the foundation for a transparent and protected transaction.

Step 2: Understanding Terms and Conditions

As a crucial step in the escrow process, reviewing and comprehending the escrow instructions and agreement is of paramount importance. 

Investopedia notes that an escrow agreement typically encompasses the following key details:

  • Identification of the designated escrow agent
  • Clear definitions of relevant terms used in the agreement
  • Specific conditions governing the release of escrow funds
  • Authorized utilization of funds by the escrow agent
  • Stipulations outlining the responsibilities and liabilities of the escrow agent
  • Transparent disclosure of the fees and expenses associated with the escrow services
  • Designation of jurisdiction and venue in case of legal proceedings.

It is vital for both buyers and sellers to meticulously review these documents to ensure accuracy and avoid any misunderstandings or disputes. 

Paying close attention to the escrow instructions and agreement can ensure that all aspects of the transaction, including timelines, responsibilities, and contingencies, are clearly defined. This will foster transparency and a smooth escrow process.

Step 3: Demonstrating Buyer's Commitment

The next step in the process is to demonstrate your commitment to buying the property. Depending on how far along in the escrow process you are, this can be done in a variety of ways:

  • Providing a deposit - If you have not yet made an offer on a home, consider providing an earnest money deposit as your first step. This shows that you're serious about buying and puts some skin in the game for both parties involved.
  • Providing documentation of pre-approval - Providing proof of pre-approval from a lender will show that they're ready and willing to lend money when needed during escrow.

Step 4: Property Inspections and Disclosures

A home inspection is a comprehensive evaluation of your potential new home that includes an assessment of the structure, mechanical systems, and major appliances. It also provides information about the condition of the property so that you can make an informed decision on whether or not it's right for you. 

During this stage, the buyer needs to conduct thorough inspections, including professional assessments of the home's structure, systems, and potential issues. Additionally, the buyer should carefully review the seller's disclosures, which provide information about the property's history, known defects, and other relevant details. 

Diligently assessing inspections and disclosures will help buyers in making informed decisions, negotiate repairs if necessary, and proceed with the transaction confidently, knowing the true condition of the property.

Step 5: Securing Home Financing

One of the critical steps in the home-buying process is obtaining the necessary financing to purchase the property. This stage involves working closely with a mortgage lender or financial institution to assess eligibility and secure a suitable loan. 

According to Forbes Advisor, the required credit score for a mortgage depends on the type of loan you are seeking. Typically, a minimum credit score of 620 is recommended for conventional loans. However, for alternative mortgage options like those supported by the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or Department of Veterans Affairs (VA), you may qualify with a lower credit score.

Buyers are required to provide documentation such as income verification, credit history, and employment details to support their loan application. The lender will evaluate these factors to determine the loan amount and interest rate. 

Buyers need to compare loan options, understand the terms and conditions, and carefully review the loan documents before proceeding. 

Step 6: Ensuring Clear Title

When buying a home, ensuring a clear title is paramount. This involves conducting a thorough title search, which examines public records to verify the property's ownership history and identify any potential liens, encumbrances, or legal issues. 

The title search aims to provide the buyer with confidence in the property's ownership rights. To protect against unforeseen title issues, title insurance is obtained. This insurance policy safeguards the buyer and lender against any future claims or disputes related to the property's title. 

Conducting a comprehensive title search and obtaining title insurance can help buyers have peace of mind and proceed with the home purchase confidently.

Step 7. Meeting Contractual Requirements

Once the escrow is opened, both the buyer and seller must fulfill the contingencies and conditions outlined in the purchase agreement. These may include appraisal contingencies, financing contingencies, or home sale contingencies. 

The buyer may need to complete a satisfactory home inspection, secure mortgage financing, or sell their existing property within a specified timeframe. Similarly, the seller may have obligations such as providing necessary disclosures or making agreed-upon repairs. 

It is essential for both parties to diligently meet these requirements to proceed smoothly toward closing the transaction and ensuring a successful home purchase.

Step 8. Completing the Home Purchase

The culmination of the home-buying process is the final step of completing the purchase. During this stage, all necessary documents are reviewed and signed, ensuring a legal transfer of ownership from the seller to the buyer. 

The escrow agent plays a crucial role in coordinating the closing process, including the preparation and distribution of closing documents. Funds are disbursed accordingly, including the payment of the purchase price, fees, and any remaining balances. 

By meticulously reviewing and finalizing all details, the closing ensures a smooth and successful transition, granting the buyer rightful ownership of the property and concluding the home purchase journey.

Conclusion

The purchase of a home is a significant investment, so it's important to understand every step of the process. By following these eight steps, you'll be able to navigate escrow with ease and ensure that your home purchase goes smoothly from start to finish.

Jamie is a 5-year freelance writer who enjoys real estate. He is currently a Realty Biz News Contributor.
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