The real estate closing process involves many steps that must happen in the right order to successfully complete a home sale transaction. This process requires coordination between the buyer, seller, real estate agents, lender, title company, and more.
The very first step in this process is opening escrow. This kickstarts the behind-the-scenes work needed to close on a home. When escrow is opened, the buyer’s real estate agent will send a copy of the fully executed purchase agreement to the escrow company. The escrow officer will then create a file and send instructions to the buyer and seller on next steps.
Opening escrow is a critical milestone, as nothing else can happen until this step is completed. It puts everything into motion and gets all parties aligned on their responsibilities leading up to the closing date. Taking this important first step helps ensure a smooth process all the way through closing. We can help: think of us as the We Buy Houses in Richmond, VA company. Also, learn more about the full Escrow Process When Selling a Home in Richmond, VA, including Title Search and Title Insurance, Home Inspections and Repairs, Importance of Appraisals, and Real Estate Contingencies.
What is Escrow?
Escrow is a service that provides a neutral third party to oversee the process of transferring real estate from a seller to a buyer. The escrow holder, typically a title company or escrow company, acts as an intermediary to handle the exchange of money and documents during the transaction.
The main role of escrow is to protect both the buyer and seller by holding the deposit funds and legal documents until all the terms of the purchase agreement have been met. This helps ensure that neither party defaults on their contractual obligations before the closing.
Here’s how a real estate escrow works:
- The buyer and seller agree to terms on the purchase of a property by entering into a purchase agreement. This contract will spell out things like the purchase price, closing date, contingencies, etc.
- The buyer will submit an earnest money deposit, typically 1-5% of the purchase price, to the escrow company. This deposit is held in trust until closing.
- The escrow holder will then create escrow instructions based on the purchase agreement. This outlines what both parties need to do to perform their contractual obligations before closing.
- As the buyer and seller work to satisfy the escrow instructions, the escrow holder will facilitate the exchange of documents and money. This includes verifying the condition of title, ensuring the lender’s requirements are met, and coordinating the closing.
- At closing, the escrow holder will disburse funds to the appropriate parties. They’ll also record the deed to transfer legal title to the buyer. Possession of the property is transferred, and escrow will then close.
So in summary, escrow acts as a neutral third party to coordinate the real estate transaction. This protects the interests of both the buyer and seller until the terms of the sale are fulfilled.
Opening escrow is typically done by the buyer’s real estate agent once a purchase agreement has been signed by both the buyer and seller.
To open escrow, the buyer’s agent will send a copy of the fully executed purchase agreement to the chosen escrow and title company. This officially engages the escrow holder to handle the transaction.
The escrow officer will review the purchase agreement, open an escrow file, and provide detailed escrow instructions to the buyer and seller. These instructions outline the tasks, deadlines, and documentation required from each party throughout the escrow process leading up to the closing.
The buyer does not need to be present to open escrow. Their agent can take care of this on their behalf after mutual acceptance of the purchase offer. The escrow holder will request any additional information or documentation needed from the buyer later on.
Opening escrow sets the wheels in motion for the property transaction. It establishes the expectations and procedures for smoothly progressing through escrow to a successful closing. Keeping in contact with the escrow officer and meeting all deadlines is crucial for both parties after this point.
After opening escrow, the escrow officer will prepare and send out escrow instructions to both the buyer and seller. Escrow instructions provide all parties with important information and spell out the specific tasks that need to be completed before closing.
Escrow instructions typically include:
- The purchase price and terms of the transaction
- Contact information for the escrow company, escrow officer, agents and parties
- Due diligence and contingency timelines and deadlines
- Loan terms and lender requirements if financing is involved
- Title insurance information and requirements
- Survey requirements if applicable
- Home warranty requirements if included
- Escrow fees and closing costs for both parties
- Closing procedures and document signing instructions
- Wiring instructions for funds transfer
- Estimated closing date and disbursement date
The escrow instructions outline who is responsible for what and keeps the transaction moving forward smoothly. Both parties must follow the instructions carefully to avoid delays. The escrow officer will work closely with both parties to ensure the instructions are followed properly leading up to the closing.
After escrow is opened, the buyer has several important responsibilities to complete before closing can happen. These include:
Depositing Earnest Money
One of the buyer’s first steps is to deposit earnest money, which shows the seller their serious intent to purchase the home. This money is held in escrow and applied to the down payment at closing. If the buyer defaults, these earnest money funds may be forfeited. Typically the deposit is 1-5% of the purchase price. The buyer should deposit these funds promptly after escrow opens.
The buyer will likely want to complete inspections on the home to ensure there are no major defects or issues. This may include a general home inspection, pest inspection, roof inspection or inspection for mold, radon gas, asbestos etc. The buyer will schedule these inspections during the escrow period. They may request repairs from the seller based on inspection results.
One of the buyer’s most important tasks is obtaining financing if needed. The buyer will need to complete the full mortgage application process, submit all required documentation, and get the home appraised. Ideally they will be approved for a loan and receive a clear to close from the lender in time for the closing date. The buyer should be responsive to the lender’s requests and move quickly to get their financing in order.
Completing these key steps allows the buyer to satisfy their obligations, so the closing can take place as planned. The buyer’s real estate agent is there to provide guidance and support through the escrow process.
The seller has several key responsibilities leading up to and during the escrow process. These include:
- Providing a title report – The seller must provide a preliminary title report showing any liens, easements or other issues that may affect the title. This allows the buyer to review potential title problems prior to closing.
- Completing repairs – If the buyer’s inspection uncovered required repairs, the purchase agreement likely obligates the seller to complete and pay for specific repairs prior to closing. The seller will need to provide receipts or other proof that required repairs were properly completed.
- Paying off liens – Any loans, judgments or tax liens on the property must be paid off in full by the seller at closing. The seller will need to obtain payoff amounts for all existing liens and bring those funds to closing. Any non-monetary liens, like easements, must also be removed if required by the purchase agreement.
- Vacating the property – In most cases, the purchase agreement requires the seller to fully vacate the property and remove all personal belongings prior to closing. This includes cleaning the property and making sure all debris and garbage is removed. The buyer will typically do a final walkthrough inspection right before closing to ensure the property is in acceptable condition.
- Transferring utilities – The seller will need to notify utility companies to take their name off the accounts. Utilities must be in service on the closing date to avoid any issues or delays. The seller is usually responsible for all utility expenses up to the point of closing.
- Attending closing – The seller must attend the closing appointment, usually at the title company, and sign all closing documents. This includes the deed to transfer ownership, as well as documents affirming a clear title. The seller will typically need to provide a valid photo ID and may require a cashier’s check for closing expenses owed.
Title and Escrow Fees
In addition to the purchase price, buyers and sellers have to pay certain fees associated with the real estate transaction.
Title Insurance Fees
The buyer will need to purchase title insurance, which protects the buyer if issues later arise with the title. There are typically two title policies – a lender’s policy that protects the buyer’s mortgage lender, and an owner’s policy that protects the buyer’s ownership interest. The title insurance fees are paid for by the buyer at closing.
The escrow company facilitates the closing process and charges an escrow fee for this service. This fee is split between the buyer and seller, with each typically paying around 50% of the total escrow fee. The escrow fee amount depends on the purchase price and location.
Some states and municipalities charge a transfer tax when a property sale closes. The transfer tax is typically paid by the seller, and is based on the sale price.
There are recording fees to file the deed and mortgage documents with the county records office. The buyer typically pays the fee for recording the mortgage, while the seller pays the fee for recording the deed.
Knowing what title and escrow fees to expect ahead of time helps buyers and sellers plan their closing costs. The escrow officer can provide a detailed quote listing all expected fees.
Setting a Closing Date
The closing date is the date when the sale of the property will be finalized and the keys will be handed over to the buyer. This is one of the most important dates in the real estate transaction process.
The closing date is typically set during the negotiation of the purchase agreement between the buyer and seller. It’s usually set 30-45 days out from the date the purchase agreement is signed, but can be shorter or longer depending on several factors:
- Financing – If the buyer is getting a mortgage, they will need time for the lender to process the loan application and approve the financing. Government-backed loans like FHA and VA loans can take 45+ days.
- Title search – The title company needs time to thoroughly research the property’s title history and confirm there are no liens or other issues. This can take 2-4 weeks.
- Inspections – The buyer may want time to complete inspections and negotiate repairs if needed. Inspections and repairs can take 2+ weeks.
- Seller’s timeline – The seller may request a longer closing date if they need more time to vacate the property or have other circumstances.
- Customary local timelines – Different areas have standard closing timeframe norms that most real estate agents follow.
It’s crucial for both parties to stick firmly to the mutually agreed upon closing date, barring any unforeseen circumstances. The buyer risks losing earnest money deposits and the seller risks losing another buyer if the timeline slips. Real estate agents will coordinate the flurry of closing tasks needed to meet the deadline.
Leading up to Closing
The weeks leading up to the closing date are busy for both the buyer and seller as they work to fulfill the requirements outlined in the escrow instructions. Here are some of the key things that typically happen after escrow opens and before the closing date:
- Inspections. The buyer will schedule inspections of the property to ensure there are no major issues. Common inspections include home, pest, roof, sewer, and mold inspections. The buyer will review inspection reports and may request repairs from the seller.
- Appraisal. The buyer’s lender will order an appraisal to ensure the property is worth the purchase price. If the appraisal value comes in lower than expected, the buyer may need to pay the difference or renegotiate the price.
- Financing. The buyer will be working to obtain financing and lender approval. The lender will require various documents from the buyer including bank statements, tax returns, and employment verification.
- Title search. The title company will research the property’s title history to ensure there are no claims against the title. They may require the seller to clear up any existing liens or judgements prior to closing.
- Home insurance. The buyer will need to obtain homeowner’s insurance for the new property. A copy of the policy is provided to the lender.
- Final walkthrough. The buyer will schedule a final walkthrough of the property shortly before closing to ensure the property condition matches the purchase agreement and that any repairs have been completed.
- Signing. The buyer and seller will review and sign all closing documents several days in advance of the closing date. This includes the deed, settlement statements, disbursement authorizations, and any other required forms.
- Transfer of funds. The buyer will transfer the remaining down payment funds to the escrow account. The lender will also transfer the mortgage funds to escrow. Any outstanding fees are paid.
Staying in close communication with your real estate agent and lender ensures the transaction stays on track leading up to the big day. Before you know it, closing day will be here!
Closing day is the culmination of the real estate transaction process. This is when the property sale is finalized and the keys are handed over to the buyer. Here’s an overview of what typically happens on closing day:
- The buyer and seller (or their representatives) will meet at the title company or escrow office to sign all the necessary documents to complete the sale. This includes signing the deed to transfer ownership and any other required paperwork like the settlement statement, tax forms, etc.
- The closing agent will conduct a final title search to make sure no new liens or judgments have been placed against the property since opening escrow. This helps ensure a clear title transfer.
- Once all documents are signed, the buyer will provide the remaining down payment owed and closing costs. The seller will hand over the keys and any other items included with the sale like garage remotes, appliance manuals, warranties, etc.
- The closing agent will disburse funds to the appropriate parties – the seller will receive the sale proceeds minus closing costs, agents will get their commission checks, outstanding loans and taxes will get paid off.
- After funds are disbursed, the closing agent will record the deed and loan documents with the county records office. This makes the sale and transfer of ownership official.
- Possession of the property now transfers to the buyer. They can pick up keys if not done already and the property is now legally theirs. The transaction is complete!
Closing day is an exciting milestone in the real estate process. It finalizes the property sale and transfers ownership after much coordination and paperwork leading up to that day. Buyers and sellers should be prepared to sign documents, hand over funds and keys, and make the sale official. With attention to detail throughout the process, closing day goes smoothly.
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