Chapter 18 Escrow Procedures

The last step in the loan process is CLOSING, when the loan proceeds are distributed and a deed to the property is transferred and recorded. These steps are usually carried out by an escrow agent. The escrow agent makes sure that all necessary documents are prepared and properly signed, calculates any necessary prorations, makes sure that all necessary funds have been deposited, and provides a settlement statement. Once everything is in order, the loan funds are disbursed, the deed and other documents are recorded, and the transaction is completed.

An ESCROW is where a neutral third party holds the items deposited by the parties to a transaction and disburses them after the conditions of the transaction have been met. Attorneys, title companies, and independent escrow companies all perform this function. Attorneys, title companies, and independent escrow companies all perform this function. Many lending institutions have their own escrow departments for the transactions that they finance. Every state has laws governing the operation of escrow agents.

All real estate escrows involve the following essential steps: 1. Gathering information necessary to prepare escrow instructions. 2. Obtaining a preliminary title report from the title company. 3. Satisfying existing loans secured by the property. 4. Preparing documents such as escrow instructions, loan documents, deeds, etc. 5. Depositing funds from a buyer or a seller. 6. Prorating expenses and allocating closing costs. 7. Preparing a Uniform Settlement Statement. 8. Issuing policies of title insurance for the buyer and the lender. 9. Disbursing funds and delivering documents.

I. Opening Escrow

Opening Escrow It is a good idea for agents and loan brokers to use an escrow progress chart. By utilizing such a chart, the progress of the escrow can be monitored and the parties can be reminded of items that still need to be completed to close the transaction. The first step in the process is to open the escrow. This is done by providing the escrow agent with the preliminary escrow instructions.

Once the instructions are prepared and signed, the escrow agent will order a preliminary title report. This preliminary report will then be forwarded to the buyer/borrower’s lender along with the escrow instructions. Note that the escrow instructions must correspond to the lender’s terms. Early in the process, the escrow agent will send a “demand for payoff” to the previous lender, if necessary. A structural pest inspection will also be immediately ordered so as to complete any needed repairs and not unduly delay the close of escrow.

II. Settlement Statement and Closing Costs

Settlement Statement and Closing Costs A SETTLEMENT STATEMENT is a listing of all the amounts involved in a transaction. In sales of residential property financed by institutional investors, the Uniform Settlement Statement is used. Items on the statement are listed as either debits or credits. Items on the statement are listed as either debits or credits. DEBIT DEBIT CREDIT CREDIT When the transaction closes, the balances for both the buyer and the seller should equal zero. Loan officers and agents are often asked to calculate an estimate of the buyer’s cash requirements for closing and the seller’s net proceeds. Loan officers and agents are often asked to calculate an estimate of the buyer’s cash requirements for closing and the seller’s net proceeds.

Figure 18-3.

A. BUYER’S COSTS The main cost to the buyer is the purchase price. There is generally a loan origination fee to cover the lender’s administrative costs. The lender may also charge points to make the loan. There is an appraisal fee, a credit report fee, attorney fees, notary fees, a fee for the lenders title insurance policy, and possibly impound fees for taxes and insurance. In addition, the borrower/buyer is responsible for any special costs that he or she incurs.

B. SELLER FEES The seller will have to pay off any existing loans, including any pre-payment penalties, at the close of escrow. The seller will also pay the sales commission and his or her portion of the attorney fees, escrow fees, notary fees, and recording fees. Depending on local custom, the seller may also pay none, all, or a portion of the title insurance premium, the structural pest control inspection/repairs, the buyer/borrower’s loan discount, and a home warranty contract.

C. BUYER CREDITS The buyer will normally be credited with any payments initially made out of pocket for an earnest money deposit, appraisal fee, credit report, and prorated taxes or rents due. The buyer will normally be credited with any payments initially made out of pocket for an earnest money deposit, appraisal fee, credit report, and prorated taxes or rents due.

D. SELLER CREDITS In addition to receiving funds from the purchase price, the seller may be due credits for items such as prorated taxes, insurance premiums, and the balance in any existing impound account that was required for the seller’s prior loan. If the property is income property, there might be a credit for prorated rents.

III. Real Estate Settlement Procedures Act (RESPA)

Real Estate Settlement Procedures Act (RESPA) The REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) applies to the sale of one-to-four unit properties that involve financing from institutional lenders where the purchase loan is secured by a first trust mortgage. In transactions subject to RESPA, the lender must give the borrower a good faith estimate of the closing costs at the time of the loan application. The lender is also required to give the borrower a booklet published by HUD which describes closing costs, settlement procedures, and the borrower’s rights. The lender is also required to give the borrower a booklet published by HUD which describes closing costs, settlement procedures, and the borrower’s rights.

IV. Additional Disclosures

Many states require additional documentation to transfer property or to obtain a loan. Many states require additional documentation to transfer property or to obtain a loan. In many cases, this consists of disclosures to the prospective borrower or purchaser.

The following are a list of the disclosures required by the state of California. 1. Real Estate Transfer Disclosure. 2. Pest Control Inspection Report.. 3. Disclosure of Geologic Hazards. 4. Disclosure of Hazardous Waste Deposits. 5. Thermal Insulation Disclosure. 6. Special Flood Area Disclosure. 7. City and County Ordinances. 8. Condominium Documents Disclosure. 9. Disclosure for Real Property Loans.