When you take out a mortgage to buy a new house, the money doesn’t go directly from your bank into the hands of the seller. It’s a bit more complicated than that. In fact, there’s a rather lengthy process that accompanies the home buying process to ensure that the funds are only transferred once the buyer and the seller fulfill a set of agreed-upon obligations.
This financial agreement is called escrow. It’s kind of like real estate limbo – a place where your money is held while you and the seller negotiate a purchase contract. Escrow isn’t an everyday word for most of us, and the concept can be confusing. We’ve decoded a few of the most common escrow terms below.
Title vesting – This term refers to how you take ownership of the property you’re buying. Real estate ownership can take several forms, and each type comes with its own rules about how ownership can be transferred and who can sign various documents involving the property. The most common types include joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property. Each type of title vesting has its advantages and disadvantages depending on your unique situation.
Earnest money deposit – There are three deposits a homebuyer must make during escrow. The first is called an earnest money deposit. This money shows sellers you’re a committed buyer. A third party, called an escrow agent, will hold your money in a special account pending the completion of the purchase agreement. Assuming your offer is accepted, this money will go toward your down payment and closing costs.
Title report – The title report is one of the most important documents a buyer will receive before the close of escrow. It serves to reveal various liens, easements, encroachments, and anything else recorded against your new home. Though it’s not the most exciting document you’ll ever read, the title report contains some critical information every buyer should read and understand. Pay special attention the legal description, property taxes, and mortgage liens.
Loan documents – If you’re like most homebuyers, you’ll need to take out a mortgage to bridge the gap between your down payment and the price of the property. There are a number of documents that accompany this loan. Among these are the note (which is basically an IOU that contains a promise to repay the loan), the mortgage or deed of trust (which pledges the property as security for the loan), and the accompanying disclosures and addendums that the buyer must sign before the lender delivers the funds.
Closing statement – The closing statement is an estimate prepared at the close of escrow that reflects all of the financial transfers between the buyer and the seller. These include the purchase price, down payment amount, payment of brokers’ commissions and all fees. The seller can see how much money he or she will receive from the sale after all closing costs, taxes, and transaction fees are paid for.