How Does Escrow Work When Selling a House?

Purpose of Escrow

Escrow is a financial arrangement between the various parties involved in a purchase and sale agreement. It is designed to be a neutral third party that holds funds, assets, and documents until all parties meet their obligations for the sale. For example, the seller may agree to pay back property taxes before the sale is final. Conditions are often included in the purchase agreement.

It’s common for real estate agents to work with an escrow company or agent. Once these conditions are met, the escrow account releases the funds and assets to the appropriate entities, namely the home seller, mortgage company, and bank. 

The Escrow Process

An escrow account can make the transaction process smoother for all parties. As a seller, it will protect you from financial liabilities in case the buyer does not fulfill their obligations. Here are the steps involved in opening an escrow account and using this tool to close a real estate deal.  

Opening Escrow Account

The escrow company holds the buyer’s funds until the closing day arrives and the sale is completed. One person applies for an escrow account with an escrow officer. Financial institutions, title agents, and some title or homeowners insurance companies offer escrow accounts. Typically, you will need: 

• Names and addresses of all parties involved
• Contact information for all parties, including emails
• Property address and type
• Sale price
• Sale conditions and terms
• Copy of purchase agreement

The cost of opening an escrow account is usually 1-2% of the purchase price, but this varies depending on the institution. Once the account is open, the earnest money deposit is placed in escrow.

An earnest money deposit signals to the seller that the buyer is serious about buying the home, but the funds are held until the conditions of the escrow agreement or purchase contract are met. 

Title Search and Examination

Next, the title company will run a search to determine the status of the property title. This process will reveal any lienholders on the property that may have a claim to it before the sale is completed. The title examination will establish clear ownership so the seller can legally sell the home to the buyer. 

If lienholders or encumbrances are discovered during this stage, they must be resolved before the sale is finalized. The buyer may continue to make escrow payments while the seller handles those situations. 

Property Appraisal

The money in the escrow account will not be released until closing day. Before this can happen, a property appraisal must be completed. The appraised value must be close to the agreed purchase price. Otherwise, the buyer’s lender may see the investment as a risk, especially if the appraised value is far lower than the final sale price. 

Loan Processing and Approval

Buyers who require financing must apply for a mortgage with a qualified lender. They must meet that lender’s requirements for a down payment, credit score, debt-to-income ratio, and other metrics used to determine the mortgage payment and mortgage insurance requirements. The lender will assess the potential borrower’s risk to determine if they will be approved.

Buyers often make home offers after being pre-approved for home loans, which speeds up the process. A typical purchase agreement includes a contingency allowing the seller to back out of the sale if mortgage approval is not secured by a specific date without legal challenges. 

This ensures the buyer doesn’t get sued if they can’t buy the house due to a home inspection, higher insurance payments, or the lender backing out. 

Document Preparation and Signing

The escrow process requires many documents. The buyer and seller must sign multiple forms, such as the title deed, loan agreement, documents about the escrow arrangement with the escrow provider, and more, before the transaction can be legally completed. Many of these documents can be signed electronically.

Some people prefer to work with a real estate attorney when selling properties and signing documents in person with their lawyer. The lawyer will often review documents before the seller accepts an offer or down payment to ensure the transaction is in their client’s best interest. 

Final Walk-Through

Before closing costs are paid and the final documents signed, there is a final walkthrough of the property. The buyer can take one last look at the home to ensure it is in the agreed condition for the sale. 

For example, if the seller agreed to some concessions and made repairs, the buyer can check to see if those repairs were completed sufficiently. The deal is ready to be finalized once the buyer completes the walkthrough and is satisfied with what they see.

Closing and Disbursement of Funds

On closing day, ownership of the property will be officially transferred from the seller to the buyer. The recording documents will be signed, and a real estate lawyer may be present. The escrow officer will then disburse funds to the appropriate parties, which may include the seller, their mortgage lender, the buyer’s agent, and the title company. 

Common Escrow Activities

An escrow account plays a vital role in facilitating the sale of a home. As a buyer, the escrow agent can guide you through the purpose of this account and why it is helpful when purchasing a property. Here are some common activities carried out by the escrow process. 

Holding Earnest Money

When the escrow account begins, the buyer makes a good-faith deposit. This money represents their intention to purchase the property, showing the seller they are committed. Once closing day arrives, the escrow funds are disbursed to the seller or the other appropriate parties. 

Paying Off Existing Mortgage

Many home sales are completed while the seller still owes money on their mortgage loan. Before the home can transfer ownership, that money must be paid to the lender. The escrow agent will take the money deposited in the third-party account from the buyer’s mortgage loan and transfer it to the seller’s lender to discharge the mortgage loan in its entirety. 

Prorated Expenses

There are numerous expenses involved in purchasing a home, including property taxes, homeowners insurance coverage, homeowners association fees, and more. Sometimes, these expenses must be shared between the buyer and seller depending on the time of year the transaction occurs. 

An escrow account can facilitate these prorated expenses to ensure all property taxes, HOA fees, and other payments are covered for the year. 

Recording Fees

The county must record the sale and the transfer of property ownership. This costs a fee, which the buyer typically pays since they are responsible for recording the new deed and mortgage. Recording fees are often paid out of the buyer’s escrow account, consolidating the various closing costs into one. 

Title Insurance

Title insurance is an extra cost most buyers and sellers forget about. However, it is important to protect both parties if there is a title dispute from another party after the sale. Title insurance is another expense that is paid from a real estate escrow account.  However, this is a separate cost from the security deposit, so sellers must deposit additional money to cover it.

Working with a Cash Home Buyer

Although an escrow service is invaluable for many buyers and sellers, it can be complicated to understand. When you sell your home to a cash buyer like A-List Properties, the escrow process becomes much simpler. We can buy your Texas house fast andwith a fair cash offer. 

Simplified Escrow Process

When you sell your home to a traditional buyer, they may require financing from a mortgage lender. This can slow down the real estate escrow process, especially if loan approval is delayed or financing takes longer than expected. A-List Properties keeps cash on hand to purchase properties in any condition, so escrow is much simpler for sellers. 

Faster Closing

Many sellers need to offload their properties quickly. Perhaps you are preparing to relocate for a new job or inherited an unwanted property. Waiting for a normal buyer to acquire financing and an escrow account can take time. 

Our team can close the deal within two weeks if you accept a fair cash offer from A-List Properties. This will significantly streamline the escrow process so you can sell your property faster. 

Reduced Paperwork

Paperwork is one of the primary sources of stress in the selling process. When dealing with buyer financing, escrow companies require additional paperwork. More contingencies could make the transaction fall apart if certain conditions are not met. A cash transaction is far more reliable and requires less paperwork, ensuring the escrow process is smoother. 

A-List Properties is ready to purchase residential real estate with fewer headaches and delays. Call us today at 972-526-7042 or complete the online form to request a cash offer from A-List Properties.