The Escrow Process, Explained (Without Making Your Eyes Glaze Over)
It may also mean that no matter how many times someone tries to explain escrow to you, you turn into Seth Rogen in The Neighbors and it all turns into a hazy blur as you try to process all that financial jargon. But it doesn’t have to be that way, and we’re here to help. Put simply, the escrow process is everything that happens between the moment your offer is accepted on a house to the moment it’s sold. (What often makes this confusing is that right after the offer is accepted, the buyer will give a good faith deposit to an escrow company—or third party—to show they’re serious about the sale, which is referred to as putting it “in escrow.”)
What are the steps for escrow?
In the escrow process, Arizona-based Realtor Stephanie Mainville explains, “the title company, lending company, and realtors all work together to bring every piece of the sale to a nice tidy bundle of paperwork at the very end.”
Since there are many hands involved in the escrow process, each individual has a specific role to play to ensure the sale happens.
The Key Players
- Realtors/agents: those who represent the buyer and seller throughout the entire process
- Title company: the company that ensures the real estate title is transferred legally over to the buyer and acts as the middleman between the buyer/seller and the escrow company to make sure all paperwork is filed properly for all parties involved
- Escrow company: the third-party company in charge of facilitating the sale
- Lender/lending company: an individual or financial institution that loans money to the buyer for the purchase of a home
A Step-by-Step Breakdown of the Escrow Process
Now, let’s break down the process for the homebuyer, shall we? During this process, the buyer will:
- Open escrow
To open escrow, preliminary documents are ordered for the buyer. These include documents for the Homeowner’s Association (if there is one), loan payoffs from sellers, property taxes, and more.
- Deposit money to the escrow company
Next, the buyer will pay a sum of money, or “earnest money.” This deposit will allow the buyer to remain in the game to purchase the house.
- Request inspection, any necessary repairs, and appraisal
Depending on the contract, the buyer will then have a certain amount of time to get the house inspected and ask for any necessary repairs from the sellers. Typically, this will be anywhere from five to ten days, depending on the market. They’ll also request an appraisal. During this step, an appraiser will also be requested to determine whether the house’s value matches the buyer’s offer.
- Negotiate based on differences between the offer and appraisal
After the final appraisal happens, the buyer, seller and their respective agents will negotiate any differences between the original offer and the appraised value (since the lending company will only lend based on the appraisal value).
- Wait for paperwork and loan to be processed
After negotiations take place (if necessary), the buyer and seller will wait for final approval from the buyer’s lender to finalize and process the loan and other required paperwork.
- Receive underwritten approval
Once the paperwork and loan are received, the closing department works with the title company to wrap up the settlement and legally transfer the house from the seller to the buyer.
- Pay closing costs
The buyer then pays all remaining costs to complete the process. The final payments will include down payments, closing cost and equity (or the amount of money the seller will net from the sale).
How long is the escrow process?
Typically, the escrow process takes between 30 to 45 days from start to finish. That may seem like a while, until you consider all of the different entities that need to work together to ensure that the sale goes through.
What should you not do during escrow?
You know that phrase “don’t quit your day job?” Seriously—don’t. Becoming self-employed or other drastic changes to your income could impact your loan and, therefore, closing on the home, Mainville says.
Additionally, while you may be tempted to pre-order a few big-ticket items for your new home, it is best to wait until after closing when the lender is no longer reviewing your bank account and financials.
Can a home fall out of escrow?
Yes. If something goes wrong during the escrow process, the home may “fall out of escrow,” and the sale won’t go through. This can happen for a variety of reasons, including the buyer didn’t qualify for financing, the inspection reveals complications, the appraisal is lower than the accepted offer or the buyer wants to pull out of the sale.
The Bottom Line
Buying and selling a home can be stressful, but once you’ve made it to the escrow process, it’s the beginning of the end—in the best way. While it can take anywhere from a month to a month-and-a-half to complete the sale once in escrow, the time goes by quickly thanks to the title, escrow and lending companies all working together efficiently to get the house sold.
Once the buyer has done their part with deposits, inspections and negotiations, the other key players take over to complete all remaining paperwork, finalize the loan and confirm financials before changing the “For Sale” sign to “Sold.”