Two closing service providers that most people know nothing of until they are in a purchase transaction are the escrow (or closing) company, and the title insurance company. In some states these two functions are managed within the same company, and in some states and they are separate companies working together to benefit both seller and buyer equally.
What is Escrow?
The role of the escrow company, (not to be confused with a borrower’s escrow account for taxes and insurance on the new loan), is directed by the escrow officer, and is that of a neutral third party firm that receives and manages the financial and ownership documents being transferred from seller, buyer, and all third party service providers in the transaction. So for example, the seller and buyer contract is sent to escrow to be confirmed as to the terms agreed upon, timing, each party’s responsibility, etc. The buyer’s good faith deposit is sent to their account escrow for safekeeping until closing.Lender documents are sent to escrow for final buyer signing, and notarizing, third party documents like homeowner’s association documents are sent to escrow for distribution to each side.
All closing costs, fees, and billings for appraisals, inspections, warranties, etc., are sent to escrow for management and accounting for final payment and distribution at closing. The final escrow steps serve to receive the funds from the buyer’s lender and to ensure that each respective party gets the amounts due him or her. The final step is to send the sellers grant deed and new loan trust deed to the county recorder to make an official public statement that the property has been sold, and state who the new owner is. Then the account is closed out with a Final Settlement Statement and a federally required form known as a HUD 1.
What is Title Insurance?
Title owner insurance,like it sounds, is an insurance policy for the owner to ensure he has clear title, meaning no liens or encumbrances that could jeopardize his claim to the property. A second version of the insurance policy is to benefit the lender to ensure there are no liens in front of its first deed of trust that would jeopardize its claim in the event of the need to foreclose on the property for nonpayment of the loan.
The title company’s role is to oversee title-related documents, notarized signatures on transfer documents, or any liens against the property. The title company also ensures that the correct owners and lien holders know who each other are by closely watching every document that is recorded against a property at the county recorder. The title company will generally pay out for any claims against the property that were missed by them if it has been recorded in public. Private or unrecorded liens cannot be insured against because there is no way of know of their existence. The title company works very closely with the escrow company, and in many cases the two roles are under one company to allow for efficiencies and oversight.
Escrow and title insurance services can be provided by a range of companies and service formats. Normally the listing agent selects these to control the seller’s risks of non-closure on the buyer’s part and the need to closely monitor the buyer’s progress to closing. The buyer can always ask to select these, but most buyers, especially first time buyers, have little knowledge of them, and the agents typically respect the seller’s need to select these critical services.
The escrow process is a complex series of multi-party steps and documents that must follow a fairly rigid format. The details of that are better left to a more in-depth discussion with a loan officer, realtor, or in our premium courses.
Like any complex project, the escrow company has a process, and milestones it must adhere to so that the transaction closes on or before the date agreed to in the purchase contract. Failure to hit these milestones by escrow or any of the parties involved can jeopardize the close date, and potentially the whole transaction. Missed closing dates cause high levels of stress on all parties, and typically cost money for both seller and buyer for numerous applicable pro-rated expenses, which are incurred daily.