What is Escrow and Why is it Needed?
Escrow is a service which provides the public with a means of protection in the handling of funds and documents. Buyers, Sellers, Lenders and Borrowers ("the principals") can conduct business with each other and minimize their risk by using a neutral party, the "Escrow Holder." The California Escrow Law, Section 17003 of the Financial Code, provides the legal definition of escrow.
In escrow, the principals give their mutual written instructions to the escrow holder, whose duty is to assure that no funds or documents will change hands until all requirements shown in the instructions have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all requirements of the escrow have been completed.
How Does Escrow Work?
The principals to the escrow (buyer, seller, lender or borrower) or the real estate agents, if any, will provide the escrow officer with the information necessary for the escrow officer to prepare ' 'escrow instructions.' The escrow instructions will tell the escrow officer what specific requirements ('contingencies') are to be completed so that the escrow can be closed. After the principals have carefully reviewed the instructions to be sure they reflect their total agreement between each other, they are to be signed by the principals. Upon mutual execution of the instructions the escrow holder will process the escrow in accordance with the instructions. When all contingencies of the escrow instructions have been met or achieved, the escrow will be "closed." Every escrow follows this basic pattern but will vary considerably due to the different contingencies of your specific transaction.
Since the escrow holder can only follow the instructions as stated, and may not exceed them, it is extremely important that the instructions be stated clearly and be complete in all details.
Your New Loan
It has become a practice of many lenders to forward their loan documents to the escrow office for you to sign. You should be aware that these papers are the lender's documents and you may need to contact your lender to explain or interpret them. You have the option of requesting a representative from the lender's office to be present while signing loan documents, or arrange to meet with your lender to sign the documents in their office.
What Happens at Closing?
Once all the terms and contingencies of the instructions of all principals have been fulfilled, and all closing conditions satisfied (including the deposit of all outstanding funds required to close), the escrow officer authorizes the title company to record all documents and to issue their policy of title insurance. When the title company confirms with the escrow officer that the County Recorder has recorded all documents, the escrow is deemed "closed." There are many aspects to the closing of the escrow, and some of these cannot be processed immediately. Upon Escrow Holder's receipt of closing information from the title company, the Escrow Holder will prepare final closing statements and closing packages. If you have special needs, please let your escrow officer know prior to close of escrow.
Title insurance policies and fire insurance policies may take several days to be delivered. Any recorded documents to which you are entitled will be mailed to you directly from the County Recorder's office. The original deed of trust (if applicable) is mailed to the lender — not to the Buyer/Borrower.
Closing Costs
The costs incurred in any escrow transaction are controlled by many factors and depend upon the type of transaction and conditions involved. Many fees are considered customary while others are charged based on your particular transaction. The escrow company has no control over the costs charged by other services such as title insurance, recording fees, lender's charges, etc.
The escrow fee is normally based on the size, complexity, liability assumed and the cost of producing the service. It may be necessary to charge additional fees for extra or unusual services performed during the course of your escrow. Upon request, your escrow officer will be able to provide you with an estimate of our costs as well as those costs charged by others, provided such information is available.
A final closing statement will be prepared after the close of escrow and will give you an itemization of all charges and credits to your account. The statement will reflect the purchase price, credits and debits to your account, payoff of existing loans, the cost for all services and the amount of the funds you are entitled to at closing. When you receive this statement, please review it carefully. If a check is enclosed with it, please cash it promptly to avoid delays and costs in replacing stale dated or misplaced checks. If you have any questions regarding your closing statement or check, please call your escrow officer for an explanation.
YOUR CLOSING STATEMENT AND ALL OTHER ESCROW PAPERS SHOULD BE KEPT IN A SAFE PLACE AND VIRTUALLY FOREVER FOR INCOME TAX PURPOSES. Your accountant will need certain information for income tax purposes. Escrow files are usually destroyed after five years, so it is important not to depend upon us to keep your records. If copies are required, a nominal fee may be charged for retrieving closed files from storage.
What About Cancellation?
No escrow is opened with the intention of canceling, but there are occasions when a transaction fails to close due to contingencies that cannot be met or when the principals disagree during the course of the escrow. Cancellation of an escrow is provided for in our Additional Escrow Conditions and Instructions.
Instructions for cancellation of the escrow and distribution of any funds deposited in escrow must be given to the escrow holder in writing. As with any other instruction, these instructions must be mutually agreed to by the principals. The escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of the MUTUALLY executed cancellation instructions. Without these instructions the escrow holder cannot make a determination as to who is the "rightful" party and therefore cannot return the funds or documents.
Sometimes, when a dispute exists, the escrow holder may be forced to allow a court to decide which party is entitled to certain documents or funds; this is called an Interpleader Action. Fortunately, most disputes are resolved before this action is taken, as the costs for such legal actions are extreme and are usually paid out of the funds on deposit in escrow.
Who Chooses the Escrow and When?
The selection of the escrow holder is normally made by agreement between the principals. If a real estate agent is involved in the transaction, the agent may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand. There are laws that prohibit the payment of referral fees; this affords the consumer the best possible escrow services without any compromise caused by a person receiving a referral fee.
When you and the other party or parties have made all necessary decisions and are in agreement to the terms of your transaction, a mutually selected escrow company should be contacted.
