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How Escrow Works

Buying a house is an exciting event, especially if you’re doing it for the first time. But it can also be a complicated process. From finding the right home to getting approved for a mortgage, it’s not as simple as it looks.

One tricky part of buying a home is the escrow process. Here’s how it works:

Defining escrow

You may have heard of “escrow” before but you might not know what it means. An escrow is similar to a trust account, where a neutral third party holds all payments and documents until closing. The escrow process takes place from the time an offer is accepted until the closing documents are signed to complete the sale. The escrow agent can be a lawyer, a banker or lender, a title company, or an escrow firm.

Opening an account

An escrow account is opened once the seller accepts your offer and a purchase agreement is signed. During this step, you deposit what’s called “earnest money” into the escrow account. This is a sum you put down to show that you’re serious about buying the house. The money is held in escrow until closing.

Getting a good faith estimate

After you’ve put in your loan application, the bank or lender will do their own appraisal of the property. If they appraise the house at a lower price than the one you agreed upon, they won’t provide you with the necessary financing. Your options are to negotiate with the seller to lower the price, pay for the difference from your own pocket, or negotiate with the lender. You may also decide to get out of the sale or look for another lender.

If the appraisal is good, your lender will draw up a Loan Estimate Form, a document that shows the details of your loan. It breaks down your interest rate, closing costs, and other important costs related to the deal. Before you sign, make sure everything looks right and negotiate further if necessary.

Disclosures and inspections

In most cases, the seller will provide you with a written disclosure that details current problems with the home. Despite this, it’s advisable that you have a professional do an independent inspection. The results will tell whether you have to negotiate more or if you’re fine with the home’s current condition.

Getting insurance

Your lender requires that you get homeowner’s insurance for as long as you’re paying your mortgage. Banks may offer you insurance with a specific company, but you can also look for better rates. You’ll also want to get title insurance in case any legal challenges come up.

Closing on your new home

The last step of the escrow process is closing. Before the date of closing, visit the property a few more times to make sure that everything is in order and that no new problems have popped up.

At least three days before closing, your lender will provide you with a Closing Disclosure Form that shows the loan terms and closing costs. This document should look almost identical to the Loan Estimate Form and should be reviewed carefully. When all the documents are signed, the escrow officer will prepare a new deed declaring you the new owner of the property. The bank or lender will then send the loan funds to the seller to complete the sale, and the escrow account will be closed.

The homebuying process can be a confusing one, but we are here to help you through every step of the process. If you’re looking for a home in the Denver area, contact The Noel Team today at 303-774- 9400 or email sjnoel@remax.net.