What is Escrow? The California Escrow Process Explained

Escrow is an incredibly important part of any real estate transaction in California. It’s a trusted third party that holds the funds necessary to complete the purchase and sale of the property until the transaction has been completed.

When you sign your escrow agreement, you agree to deposit your earnest money deposit with your escrow agent. And it’s important to understand what happens during this escrow process so you don’t run into any issues when it comes time to close on your purchase or sale.

Understanding Escrow

The escrow process helps ensure that buyers get what they expect when they purchase a home, and sellers receive their payment on time. If you’re buying or selling a home in California, then it’s likely you’ll experience an escrow process.

Read on to learn more about what an escrow company does and how an escrow works in general. First, let’s talk about why escrow exists in the first place. A neutral third party—the escrow company—is used to facilitate transactions between two parties who don’t know each other well enough to trust one another.

This way, both parties can be sure that everything will go smoothly during closing day. The buyer transfers funds into an account controlled by the escrow company, which verifies that all of these funds are available before releasing them to the seller on closing day.

How to Choose an Escrow Company

If you’re buying a home, chances are you’ll need an escrow company to hold onto your deposit and complete your purchase. As a seller, you may want to consider hiring an escrow company to complete your transaction as well. In either case, it’s important to choose carefully. Here are some things you should consider when selecting an escrow company: Is there a minimum amount of money I have to spend with them?

How much will their services cost me per month or year? How long has the escrow company been in business? What types of services do they offer and who can use them (individuals or businesses)? Do they charge any fees for setup, for example?

When Can a Seller Choose their Own Title Company

In many cases, a seller in California has no choice but to use their agent’s title company. But there are times when it makes sense for a seller to not go with their own real estate agent’s company.

One example: If a property is going on sale for more than $400,000, many agents will steer buyers towards one of their affiliated firms. You may be forced to use that company if you choose to stay with your agent, which means you’ll have to pay higher fees and encounter less competition among title companies.

Frequently Asked Questions About the Escrow Process in California

Escrow sounds intimidating, but it’s actually a very straightforward process. An escrow agent—such as a title company or attorney—acts as an intermediary between buyers and sellers. For example, when you purchase a home, you typically make a down payment on your new property and sign over your old place to your lender.

Then, once you close on your purchase, those funds go into an escrow account for eventual transfer to the seller. This protects both parties; in case of default, neither party is at risk since all monies are held by an independent third party. It also reduces the risk for you since there’s no money sitting in limbo while you worry that something might fall through with your closing date.

Get Qualified for a Home Loan

First, you’ll need to start by gathering your financial documents: Federal tax returns (IRS Form 1040), pay stubs, proof of current address, and possibly an appraisal of a property you already own. Once those have been verified, your lender will present you with a loan application and disclosures that detail interest rates, closing costs, and fees associated with obtaining your mortgage.

Your bank will also run a credit check on you to determine whether or not they feel comfortable giving you that loan. Next, they’ll take all of these documents and turn them into a package that can be reviewed by underwriters within their company to make sure it’s everything it needs to be for approval.

Closing Costs & Fees Explained

Whether you’re purchasing or selling a home, it pays to know exactly what you’ll pay at closing. While there are many fees involved in closing, here are a few that typically come up when purchasing property: Loan Origination Fees (LOF): This fee is charged by your lender and covers their costs for processing your loan.

It can range anywhere from 1% to 4% of your total loan amount, but it’s usually around 2%. Settlement/Closing Fees: As its name suggests, settlement fees cover legal and administrative costs that occur at settlement. They typically average about $1000.

What Happens at Close of Escrow

When a buyer and seller agree to close escrow on a particular property, they sign an agreement known as a purchase and sale. In addition to outlining how much money each party will pay during escrow and other details regarding transfer of ownership, the purchase and sale also defines what happens at close of escrow.

While these agreements differ depending on where you live in California, there are several common items that should be addressed during this stage. For example, both parties may enter into a subject-to agreement outlining any exceptions to ownership that are still outstanding.

Transferring Ownership – Change in Deed

When one party transfers property ownership to another, they need to change out any old titles with new ones. This way, everyone knows who owns what land and where. So, if a husband and wife owned a house before getting divorced, for example, both of them would sign their original deed over to an escrow agent—the third party who will hold onto all of their deeds until closing.

These days, most escrows happen online or through an app that can keep track of all involved parties. In fact, it’s likely that you already use some sort of escrow service every time you purchase something on Amazon! That’s because Amazon uses a third-party service called Title Source to help transfer title between buyer and seller in its marketplace.

The more you know about your home sale or purchase, the better!

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