So, what the heck does “escrow” mean anyway? Well, an escrow is generally defined as:
A process wherein a buyer and seller provide documents, instructions and funds to a neutral third party (title company or escrow company) until certain conditions are fulfilled.
In Arizona, a buyer doesn’t pay a seller directly for the property, but rather deposits funds with a title company–the title company, acting as an intermediary, handles all funds and verifies that all written instructions in the contract have been met. Back East and in some other parts of the country, attorney’s are used to handle the sale, but in Arizona, we use title or escrow companies. Every escrow may be slightly different depending upon the type of property involved, but here is a snapshot of the escrow process for a single family home that lies within an HOA (homeowner’s association)–keep in mind that there are many other minor tasks that the escrow officer will complete before the escrow can close/record.
Arizona Escrow Process Explained
- Buyer’s agent delivers a fully signed Residential Purchase Contract to the title company along with the earnest deposit. Typically, the contract will be sent by email and the earnest funds will be picked up by a runner service sent by the title company (if the deposit is in the form of a check) or the funds will be wired by the buyer directly to the title company.
- The escrow officer will open the escrow and will send out an earnest money receipt to all parties.
- The escrow officer will send out opening packages to the buyer and seller. The opening packages include a request for contact information, sellers loan pay-off information, completion of an identity statement, etc.
- The escrow officer will order the title commitment and the HOA demand. The HOA demand is a request for the HOA fees such as the disclosure and transfer fees and it’s a request to send pertinent information to the buyer such as the HOA financials and CC&R’s (covenants, codes and restrictions). The title commitment will only be issued once the property records have been researched and examined to be sure that clear title can be issued. If there are items that must be cleared up before title insurance can be issued, those items will be listed on the title commitment.
- The escrow officer will work with all parties to clear/satisfy all requirements on the title commitment.
- If the buyer is obtaining a loan, the lender will send instructions to the escrow officer and once the lenders loan documents are received by title, the escrow officer will prepare the HUD-1 settlement statement–soon to be called the Closing Disclosure. The settlement statement lists all the debits and credits for the purchase/sale and the lender must approve the settlement statement before the buyer can sign. Typically, the seller may sign well in advance of the buyer, but if the lenders loan package contains documents that require the sellers signature, the seller will sign around the same time as the buyer.
- Once the buyer signs the loan/escrow documents, the loan package will be sent back to the lender for review. If everything looks okay, the lender will wire funds to the title company. The buyers funds are typically delivered via a wire transfer or cashier’s check the day before closing.
- Once the title company is in receipt of the lenders funds, the escrow officer will release the closing package to the Maricopa County Recorder’s Office and once key documents are recorded, the buyer becomes the new owner of the property!
Again, there are other steps to a successful escrow, but these are the major points. In item # 6, I mentioned a change regarding the settlement statement–this change is supposed to take effect on August 1, 2015. Here is a brief synopsis of the upcoming changes:
The Consumer Financial Protection Bureau’s (CFPB) rule, which integrates forms required by the Truth-in-Lending Act (TILA) and the Real Estate Settlement and Procedures Act (RESPA), is supposed to go into effect no later than August 1, 2015. In a nutshell, the HUD-1 settlement statement and final Truth-in-Lending disclosure will now be combined into one document called the Closing Disclosure–this disclosure must be provided to the buyer no later than three days prior to the close of escrow and the buyer must be given up to three days to review the Closing Disclosure. This new change is going to greatly impact the length of escrows and the overall process that occurs just prior to closing.
Here is a timeline of the Three-Day Closing Disclosure Rule which shows when disclosures are due and when the disclosures must be mailed (unless the lender will use email)–this handout was provided by the American Land Title Association. Here is an example of a Sample Closing Disclosure which shows the combined TIL and HUD-1.
If you’d like a referral of a great escrow officer/title company, here are four that I have had great success with: