This article explains how to understand the California home buying escrow process. Focusing on the California home buyer during the escrow process.
Overview of the California Home Buying Escrow Process
Similar to other states, the California escrow process requires hiring an escrow agent. This neutral third party holds the buyer’s funds to meet the terms and conditions of a written purchase contract between the buyer and a seller.
Once the escrow agent verifies that all parties completed their obligations under the purchase contract, the buyer’s funds pay for the real property.
Each Step of the California Home Buying Escrow Process
Step 1: Disclosures, Inspections, and Credits
The initial steps begin after the buyer’s agent delivers a signed purchase contract to the escrow agent. These steps include:
1. Seller accepts buyer’s offer and both parties sign a purchase contract. Now the escrow process begins.
2. The buyer produces a deposit (called an earnest money) normally in the form of a bank check given to the seller’s agent. This deposit never goes directly to the seller. Instead, the earnest money goes to the escrow company or an attorney depending on the wording of the contract.
3. Then, the seller produces property disclosures which the buyer reviews and accepts or rejects. Seller’s disclosures differ depending upon the property type. However, they often include known property flaws, previous improvements and repairs, and potential environmental hazards. Often, when the selling agent lists the property for sale, a “disclosure package” is provided to the seller to fill out. Known home defects are supposed to be disclosed prior to accepting the buyer’s offer.
4. After the buyer reviews all of the property disclosures, he or she may negotiate a lower sales price to pay for the necessary repairs. Some sellers obtain the repair costs from reputable general contractors and adjust the original sales price.
5. Most buyers obtain a home inspection as agreed upon in the purchase contract. Such contract conditions are known as the “inspection contingency”. Purchase contracts usually contain a specific date for completion of the inspections. Buyer home inspections usually entail:
- Pest inspection;
- General Contractor inspection;
- Roof inspection;
- Sewer inspection; and
- Chimney inspection.
6. After the completion of the inspections, the buyer either re-negotiates the sales price to reflect the necessary repairs or removes and waives the inspection contingency. Negotiations may allow for sales price reduction, buyer’s credits at closing, or other options. The seller responds to these requests by either agreeing to all of them, counteroffer with a modified solution, or decline any solutions. In reply, the buyer either tries to re-negotiate, accepts the seller’s response, or ends the transaction. The earnest money returns to the buyer if the transaction terminates.
Step 2: The Mortgage Escrow Process
1. The buyer submitting a loan application to a lender directly or using a mortgage broker. Take a look at a federal Fannie Mae Uniform Residential Loan Application for California to see the required information.
3. The lender then requires the buyer to prepare a number of personal financial disclosures. The most commonly requested documents include:
a) Several monthly bank statements from every bank account the buyer holds. This also includes investment accounts.
b) Several monthly statements regarding all lines of credit, outstanding loans, and other debts. This includes rent payments.
c) Federal tax returns for the past two years by providing written authorization for the lender to access such information from the IRS. This entails filling out IRS form 4506-T known as a “Request for Transcript of Tax Return”.
d) Recent verification of employment wages with full contact of the buyer’s employer.
e) Explanation of all credit inquiries (why specific inquiries were made to credit bureaus)
f) Substantiate all large cash gifts and large deposits which are not regular income. This includes all documentation.
g) Additional disclosures related to the buyer’s financial situation. This includes:
- Marriage license
- Divorce settlement
- Child support
- Civil Court Judgments.
4. After all document submissions, the lender rejects or approves the mortgage. If approved, the lender issues a “loan commitment letter”. This letter states the lender’s willingness to fund the mortgage under specific conditions. Typical conditions include a “property appraisal” to confirm current market value.
5. The purchase contract’s loan or financing contingency normally contains a “loan contingency date”. If the loan commitment letter has not been received by the buyer by this date, California law requires the buyer to submit a written request for an extension. Then, the seller only has a certain number of days (contained in the purchase contract) to deny the extension. Otherwise, the extension occurs.
6. The appraisal ordered by the lender or mortgage broker is then conducted. If the appraisal shows a lower market value than the sales price, the lender may reject the mortgage. At such point, the buyer and seller must agree on a lower sales price. In California, the purchase contract usually contains an “appraisal contingency date” as a deadline for adjusting the high sales price.
7. Then, the buyer purchases “homeowners insurance” with “proof of homeowner’s insurance” submitted to the lender.
As you can see, the mortgage escrow process requires great details and time. Additional stress occurs for buyers to avoid any life changes (like credit or employment) until the entire transaction completes. This entails not switching jobs even for higher wages or opening a new credit card account or leasing a car or anything else affecting your credit status.
Strep 3: Closing of Escrow
In California, the closing entails these steps:
2. Preparation of “title insurance”. This protects the buyer from fraud, forgeries, unapparent encumbrances, and liens. In addition, if the seller is not the only owner requiring the approval of the sale from other parties, the buyer is protected.
3. The escrow agent receives final loan documents from the lender.
4. All closing documents signed by the buyer. This includes the final mortgage documents and the “HUD-1 Settlement Statement”.
5. Then the buyer pays all remaining closing costs after the down payment’s credit to the escrow agent. To speed up the closing process, buyers often pay the remaining balance in advance.
6. The “title deed” (or grant deed) gets “recorded” with the appropriate government agency transferring title to the buyer. Then, the seller and all other appropriate parties (real estate brokers, attorneys, etc.) get paid by the escrow agent.
7. Finally, the keys to the new home delivered to the buyer who takes possession of the property.
How to understand the California home buying escrow process explained here.
Steven Rich, MBA – Guest Blogger
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