Escrow Explained: How It Works and Why It’s Important

Buying a home is one of the biggest financial transactions you will ever make. It’s important to ensure that all parties fulfill their obligations and are protected throughout the process. This is where Escrow comes in. 

Escrow is a legal agreement between two parties (the buyer and seller) where a neutral third party (the Escrow agent) holds all funds and documents until the transaction is complete. It is an essential part of the real estate process across the United States, and it is no different in California.

The Escrow process can be complicated, but rest assured that your real estate agent will walk you through the process. Escrow is crucial for protecting both parties and ensuring a smooth transfer of ownership. Once all the papers are signed and you have the keys to your new house in hand, the Escrow account is closed. In this blog post, we will explore the details of Escrow in California real estate and break the process down for you.

What is Escrow in California Real Estate?

Simply put, the Escrow process occurs between the time a seller accepts an offer to purchase and the buyer takes possession of the home. When the seller accepts your offer and you sign a purchase and sale agreement, the Escrow process begins. As the buyer, you are obligated to provide earnest money to be held in the account until closing day. Think of earnest money as your deposit on your new home. 

As a homebuyer, you will almost always have to put money in an Escrow account. If you have a government-backed loan, like a FHA loan or USDA loan, an Escrow account is required. If your down payment is less than 20 percent of the purchase price, an Escrow account is also required. Many mortgage lenders require an Escrow account.

Why is Escrow Important in California Real Estate?

Escrow is important for several reasons. An Escrow account serves both parties. It provides a safe and secure way for buyers and sellers to complete a real estate transaction. 

The Escrow process protects the buyer’s deposit. If the seller fails to meet the conditions of the purchase agreement, such as fixing necessary repairs, the buyer can cancel the transaction and get their deposit back.

The Escrow process protects the seller from fraudulent buyers. The Escrow agent verifies the buyer's financing and ensures that they have the necessary funds to complete the transaction.

As a neutral third party, the Escrow agent ensures that all terms of the purchase agreement are met, such as a home appraisal, home inspections, and financing requirements. They also verify that all necessary documents, such as the deed and title, are in order.

Once all conditions are met, the Escrow agent releases the funds to the seller, and property ownership is transferred to the buyer. The Escrow process typically takes 30 to 60 days, depending on the complexity of the transaction.

How to Open an Escrow Account in California Real Estate

Opening an Escrow account in California real estate is typically done through the buyer's real estate agent. The agent will provide the buyer with a list of reputable Escrow companies to choose from.

Once the buyer selects an Escrow company, they will need to provide the Escrow agent with the purchase agreement and the buyer's deposit. The Escrow agent will then begin the process of verifying the documents and ensuring that all conditions are met.

The buyer and seller will be required to sign additional documents, such as a preliminary title report and a statement of information. These documents provide the Escrow agent with important information about the property and the parties involved in the transaction.

The Escrow agent will also coordinate with the buyer's lender to ensure that all necessary documents are in order and that the loan is funded on time.

How to Close An Escrow Account in California Real Estate

Closing an Escrow account in California real estate involves several steps. Once all conditions of the purchase agreement are met, the Escrow agent will prepare the final documents for the transfer of ownership.

The buyer and seller will be required to sign the final documents, including the deed and the settlement statement. The settlement statement provides an itemized list of all fees and charges associated with the transaction, including the Escrow fees.

The Escrow agent will then record the deed with the county recorder's office, and ownership of the property will be transferred to the buyer. The Escrow agent will also disburse the funds to the seller and any other parties involved in the transaction, such as the real estate agents. At the end, the sale is finalized and your Escrow account is closed. 

An Important Distinction: Close of Escrow vs. Closing Date

If you’re in the process of buying a house, you’ve likely heard the phrase “closing day.” You vaguely understand that it involves signing a lot of papers and being handed the keys to your new home, and you’re looking forward to it. But what is the difference between the close of Escrow and closing day?

The close of Escrow happens when both parties complete their part of the agreement. This typically happens on your closing date, but it is possible to close Escrow before or after your closing date.

You might plan to close Escrow after your closing date if the seller is still in possession of the home. For example, your contract might have allowed the seller to rent the property past the closing date. In that case, the seller likely put a deposit in the Escrow account, and Escrow remains open until the seller vacates the property. If the seller damages the home or doesn’t leave by the agreed upon time, the buyer (now homeowner) receives those funds. Then, Escrow is officially closed.

Navigating the Escrow Process in California Real Estate

Escrow is an important part of the real estate process in California. It provides a safe and secure way for buyers and sellers to complete a transaction, protects both parties, and ensures a smooth transfer of ownership. 

It is important to familiarize yourself with the Escrow process, but remember that your real estate agent will walk you through every step. At Willowmar Real Estate, it is our honor to help California buyers find their dream properties. Send us an email at [email protected] for any questions or for more information.