Buyer's Guide

Escrow 101
An escrow is defined as a transaction where an impartial third party (escrow agent) acts as an agent to both parties (seller and buyer, borrower and lender, etc.), and acts only under instructions in delivering papers, completing and recording documents, and receiving and disbursing funds.  These functions may vary by custom or law from state to state.

Also, in some states the term may be used in the plural to describe the funds the lender collects to pay taxes and insurance.  Also known as Impounds.  The escrow is overseen by an escrow officer employed by an independent escrow company or title company.  The process begins when a purchase contract and joint escrow instructions, earnest money and/or documents are deposited with the mutually agreed upon escrow officer.

Tasks of an Escrow Officer may include receiving and depositing money; ordering payoff demands of existing liens; calculating and/or prorating taxes, liens, interest, rents, and insurance policies; making arrangements for title insurance for the buyer and lender; completing and/or receiving loan funds from new lender once their conditions have been satisfied; arranging for recording of the conveyance documents, lien instruments and any other legal instruments required to transfer title to the property pursuant to the terms of the purchase agreement and lender's instructions; closing escrow and disbursing funds as agreed upon in the instructions; and preparing closing statements for the parties showing disposition of funds.

The selection of the escrow holder is normally done by agreement between the parties to a transaction. Typically, the escrow is opened by the buyer's or seller's real estate agent.

Escrow may be opened via telephone, email, website order form or in person, depending upon the preference of the real estate agent.

An "escrow number" is assigned and information is entered into the computer. Upon issurance of an escrow number, the escrow officer will order a Preliminary Title Report or Commitment for Title Isurance.

The escrow officer will need some basic information in order to open and proceed with the escrow:

  • Street address and parcel # if available
  • Sales Prices
  • Full names of all buyers and sellers and their marital status
  • Contact information for all principals. Mailing address, phone numbers, email addresses.
  • Existing lender name, loan number and contact information
  • New lender contact information if applicable
  • Homeowner's Association (HOA) management company information (if any)
  • Commission amounts

In general, the first item received is the buyer's earnest money deposit and a copy of the fully executed purchase and sale agreement. The escrow file will grow, item by item, until all of the conditions have been met and the escrow is ready to close.

Title, escrow and real estate companies are members of highly regulated industries. They are overseen by local, state and federal regulatory agencies, and must comply with extremely high standards of integrity and fiscal responsibility. However, escrow officers are not attorneys and may not give legal or tax advise.

The escrow officer's intent is to make the closing go as smooth and error-free as possible, and to be an active participant in a successful transaction. Throughout the escrow process, securing timely and complete information is one of the keys to exceptional escrow service.

​If You are Opening the Escrow, Please Provide the Following:

  • Complete street address (Avenue, Drive, Street, Number, etc.) and parcel number if possible.
  • Full names and marital status of all buyer and sellers (initials are not enough). If a married couple is involved, the first name of the wife as well as the husband is essential, along with addresses including email and phone numbers.
  • Use of property: is it a rental or owner occupied?
  • Names of any existing mortgage companies, including all lien holders and private parties, to be paid off at closing. Escrow will need the company name, loan number, address, telephone number.
  • Homeowners Association (HOA) name and the contact information for its Management Company.
  • Additional items such as termite report and/or completion, home protection invoice, natural hazard report invoices, etc.

The Escrow Officer Will Also Need the Following from the Buyer’s Agent:

  • Full names and marital status of all buyers (initials are not enough). If a married couple is involved, the first name of the wife as well as the husband is essential, along with addresses and phone numbers.
  • How the buyer(s) wants to take title.
  • New lender contact information.
  • Fire/hazard insurance information for new policy or existing policy.

After The Escrow is Open:

When calling the escrow officer, have the escrow number and buyer/seller’s names available.  Keep the escrow officer informed on any matters that may affect the transaction.  Direct your client’s questions to the proper representative, such as:

  • Real Estate Agent: Physical aspects of property, conflicts, and terms of sale.
  • Lender: Loan terms, credit report issues, etc.
  • Escrow officer: Escrow instructions, documents and forms to be filled out.

Red Flags

A “red flag” is a signal to pay attention! These situations may cause delays or other problems within an escrow and must be addressed well before the escrow is expected to close. The Preliminary Title Report or Commitment for Title Insurance may reveal many red flags, so the escrow officer reviews it carefully. Real estate agents and parties to the transaction should also review the Preliminary Title Report for items which could cause delays. Life changes could be considered “red flags” as well.

Here are a Few items to Watch For:

  • Bankruptcies
  • Use of a business trust
  • Clearing liens and judgments, including child or spousal support liens
  • Encroachment or off-record easements
  • Use of a family trust
  • Foreclosure
  • Probate
  • Proper execution of documents
  • Proper jurats, acknowledgments and notary seals
  • Recent construction
  • Transfers or loans involving corporations or partnerships
  • Last minute change in buyers
  • Last minute change in type of title insurance coverage

Red Flag Examples

  1. The buyer or seller has been involved in a bankruptcy: If the bankruptcy is still pending, obtain the contact information for the attorney. Escrow will need to work closely with the title company to determine if any additional requirements must be met.  For example, if the seller is in bankruptcy the escrow cannot close until the property is released from any pending bankruptcy proceedings.
  2. The seller or buyer intends for the proceeds being derived from or used to purchase the property be part of a tax-deferred exchange: To prevent delays in closing this transaction, obtain the contact information for the tax-deferred exchange accommodator. Your escrow officer will work closely with the exchange company to make sure all state and federal tax guidelines are followed.
  3. If the Seller is married, but the spouse is not a record title holder the spouse may be required to sign a quitclaim deed conveying their community property interest in the property to the other spouse.
  4. If the clients do not speak English: Our diverse population includes many buyers, borrowers and sellers who do not speak English or for whom English is a second language. If you plan to use an interpreter, inform your escrow officer so that appropriate accommodations may be made for correspondence and the signing appointment.
  5. The property is being sold because of a divorce: Is the divorce final and are the appropriate documents available? Has one spouse deeded the property to the other? If not, both the husband and wife will be required to sign all listing and escrow documents. Will two separate checks be required for proceeds? Do you have current addresses and other contact information for both parties?
  6. One of the owners is recently deceased: Many red flag situations arise from the death of a property owner. If this is a sale, appropriate documents must be prepared in order to close the escrow. Is probate proceeding on the estate of the deceased? Was a family trust established prior to the death of the seller? If so, you need to know who the Successor Trustee is in order to obtain proper signatures. Involve your escrow officer early and save frustration for all.
  7. One of the principals is using a Power of Attorney: Is the Power of Attorney legal, binding and sufficient to convey or purchase real property? The document should have been recorded in the county and state where the property is located, and should be less than two years old. Provide a copy of the document to your escrow officer as soon as possible.
  8. Buyers want to hold title in the name of a trust: If they are getting a new loan, their lender may have additional requirements, so be sure to raise this issue as soon as possible.
  9. Seller lives in another state or is selling a property other than the principal residence: Some states (such as California) require tax withholding on the sale of certain properties. Check with your escrow officer immediately to discuss special tax reporting situations.

​The purchase of a home is often the largest single financial investment many people may make in their lifetime. The importance of fully protecting such an investment cannot be overly stressed.  Title insurance provides some types of protection.

What is Title Insurance?
Title Insurance is the application of the principles of insurance to risks present in all real estate transactions. These risks are divided into two main categories: hidden hazards that cannot be detected in the examination of title, and human errors.

Examples of hidden hazards are forgery, incompetence of grantor or mortgagor, unknown heirs, fraud, impersonations, etc.

Title insurance differs from other types of insurance by protecting against future losses arising out of events that have happened in the past. There are no annual premiums. A single premium, based on the amount of the sale or mortgage, is paid when the policy is issued and is good for the life of the policy. A lender’s policy, insuring the lender, stays in effect until the loan is paid off. An owner’s policy, insuring the buyer, is good as long as the owner or owner’s heirs own the property.

Preliminary Title Report or “Commitment for Title Insurance”
The title company will search and examine the public records to investigate information surrounding title to the property.  The title search is used to create a Title Report provided to the lender and/or buyer  before closing, and reveals the following:

  • Who the legal owner of the property is
  • That the “estate” or degree of ownership being sold is currently and accurately vested in the seller
  • Property tax status and other public or private assessments
  • The presence of any unsatisfied mortgages, judgments or liens that must be satisfied before “clear title” can be conveyed
  • Existing easements, restrictions, rights of way or other rights granted to others

The title company is involved in the real estate transaction almost from the time the purchase agreement is signed, through and beyond the closing. Working mostly behind the scenes, but always in close coordination with real estate agents, lenders, escrow officers, and legal counsel. The title company strives to carry out an important, complex procedure in an efficient and professional manner.

What’s in a Name?
Statements of Information provide title companies with the information they need to distinguish the buyers and sellers of real property from others with similar names. After identifying the true buyers and sellers, title companies may disregard the judgments, liens or other matters on the public records under similar names. To help you better understand this sensitive subject, the California Land Title Association has answered some of the questions most commonly asked about Statements of Information.

What is a Statement of Information?
A statement of information is a form routinely requested from the buyer, seller and borrower in a transaction where title insurance is sought. The completed form provides the title company with information needed to adequately examine documents so as to disregard matters which do not affect the property to be insured -- matters which actually apply to some other person.

What Does a Statement of Information do?

Every day, documents affecting real property liens, court decrees, and bankruptcies are recorded. Whenever a title company uncovers a recorded document in which the name is the same or similar to that of the buyer, seller or borrower in a transaction, the title company must ask, “Does this document affect the parties we are insuring?”  Because, if it does, it affects property title and could, therefore, be listed as an exception from coverage under the title policy. A properly completed Statement of Information will allow the title company to differentiate between parties with the same or similar names when searching documents recorded by name. This protects all parties involved and allows the title company to carry out its duties efficiently, and without unnecessary delay.

What Types of Information are Requested in a Statement of Information?
The information requested is personal in nature, but not unnecessarily so. The information requested is essential to avoid delays in closing the transactions. You and your spouse, if you are married, will be asked to provide full name, social security number, year of birth, birthplace, and information on citizenship. If you are married, you will be asked the date and place of your marriage. Residence and employment information will be requested as well as information regarding previous marriages if you are divorced.

Will the Information I Supply be Kept Confidential?
The information you supply is completely confidential and only for escrow and title company use in completing the search of records necessary before a policy of title insurance can be issued.

What Happens if a Buyer, Seller or Borrower Fails to Provide the Requested Statement of Information?

At best, failure to provide the requested Statement of Information will hinder the search and examination capabilities of the title company, causing delay in the production of your title policy.  At worst, failure to provide the information requested could prohibit the close of your escrow.  Without a Statement of Information, it may be necessary for the title company to list, as exceptions from coverage, judgments, liens or other matters which may affect the property to be insured. Such exceptions may be unacceptable to most buyers and lenders, and could potentially result in the loss of the deal.

Vesting "Ways to Hold a Title"

The escrow officer often provides a form that will be filled in with the vesting choice at the beginning of the escrow. The form will also ask how the buyer intends to take title to the property (i.e., an Unmarried Man, a Married Woman as her Sole and Separate Property, Husband and Wife, etc). Vesting information must also be provided to the new lender so that loan documents may be prepared to reflect the buyer name(s) and vesting according to the buyer’s wishes.

Your escrow or title company can provide you with a list of vesting choices, as well as descriptions of some of the consequences of each method of vesting. Although vesting choices vary by state, they concern either individuals (such as a married man and woman) or entities (such as a corporation, partnership or trust).

One of the most frequent questions asked of escrow officers is “How should I hold title?” Escrow officers are not attorneys and cannot give legal advice. Therefore, it is important that buyers take some time before the close of escrow to research and decide upon their vesting choice. There are important legal and tax ramifications inherent in the vesting choice, and clients are encouraged to speak with their legal or tax advisor.

Change of Ownership Filings

When property changes hands, local government agencies require notice of change of ownership. At the local level, this would be any county office that assesses or collects taxes. Reporting a change in the ownership of the property allows the local jurisdiction to assess the tax liability for each property as the title is transferred from seller to buyer.

The reporting documents vary from state to state, but require at minimum the names of the seller and buyer, assessor’s parcel number or other property identifier, the property location and tax address. Also required is the total purchase price, limited terms of sale and signature of the new owner. The reporting document is recorded along with the conveyance documents evidencing a change in ownership. In California, the document is called a Preliminary Change of Ownership (PCOR), and it assists the local agency in identifying situations in which a property reassessment is allowed under Proposition 13. In Nevada, it is called the State of Nevada Declaration of Value. 

Penalties or fines may be assessed from the governing body for failure to file the document as required by state or local laws. The escrow officer will need the customer to complete the document. The escrow officer will ensuring it reaches the Recorder’s Office along with the other documents pertinent to the change of ownership.

Some situations which appear to be a change of ownership are exempt from the filing of this type of document, including corrections to the record and status changes such as a change in vesting for estate or tax planning purposes. 

Federal Requirements
The Internal Revenue Service (IRS) requires settlement agents AKA escrow officers report certain information pertaining to sales of real property. Under the Tax Reform Act of 1986, reportable transactions include sales and exchanges of 1-4 family residential properties such as houses, townhomes and condominiums. Also reportable is stock in cooperative housing corporations and mobile homes without wheels. Specifically excluded from reporting are foreclosures and abandonment of real property, as well as financing or refinancing properties.

The escrow officer will ask the seller to complete a Certification for no Information Reporting or1099-S Solicitation form required by the IRS. The seller is required to provide his or her correct taxpayer identification number (Social Security number), as well as the closing date of the transaction and gross proceeds of the transaction. Most settlement agents now transmit the reportable information electronically to the IRS at the end of the year. A hard copy of the form is included in the seller’s closing documents for their records.

Property Taxes
Homeowners pay property taxes to their appropriate assessment, collection or tax department in each county. A change in ownership or the completion of new construction could result in a change in the assessed value of the property and may result in the issuance of a supplemental property tax bill. Taxes are due on specific dates, and become delinquent when not paid (penalties are assessed for delinquent taxes). The yearly “tax calendar” varies by state.

In addition to standard property taxes, many jurisdictions also contain special assessment districts, which may have been formed as a means of financing infrastructure. Bonds may have been sold to finance the infrastructure and the ultimate property owner continues to make payments on the principal and interest on the bond. The bond issues vary in size and term. Other special city and county districts may be assessed for a variety of purposes, including street lights and traffic signals, street maintenance, certain educational purposes, etc.

Transfer Tax
Transfer Tax is a tax collected by the County Recorder when an interest in real property is conveyed. It is paid at the time of recording, and is computed using the actual sales price. An amount, legislated by the state or county, is charged per $500 or $1,000 of the sales price. Although it is customary in some areas for the seller to pay this tax, in other areas custom and practice have dictated the buyer and seller split the payment.

 Many cities have levied an additional tax within their jurisdictions. In some counties, these taxes are collected by the County Recorder along with county transfer tax, but in other areas a separate check will be mailed to the city. Your escrow officer is familiar with the taxes required and will coordinate payment of the appropriate amount.

Good Funds

Occasionally, parties to the escrow are required to bring in additional funds to complete the transaction. Most states have laws which stipulate that the escrow cannot proceed unless the funds are “good” (i.e. have cleared the appropriate banking institution and are available for use).

For this reason, funds due at closing should be by a transfer of funds (wire) between accounts through the Federal Reserve Banks or any federally-chartered bank or credit union. Any other remittance could add several days to the processing time and will cause delays in the escrow closing.​

  •  Loan Fees:  These are fees that the lender charges to process, approve and make the mortgage loan.​
  • Appraisal Fee:  This charge, which may vary significantly for different properties, pays for a statement of property value for the lender, made by an independent appraiser or by a member of the lender’s staff. The appraiser inspects the property and the neighborhood, and considers sales prices of comparable properties and other factors in determining the value. The appraisal does not, however, necessarily detect or discuss defects in the property or title to the property. Your lender may provide a copy of the appraisal to you upon request although they may not be required to do so unless specified in state law.
  • Credit Report Fee:  A credit report shows your credit history. The lender uses the information in a credit report to help decide whether or not to approve your loan and how much money to lend you.
  • Lender’s Inspection Fee:  This charge covers inspections, often of newly constructed housing, made by employees of your lender or by an outside inspector.
  • Mortgage Insurance Application Fee:  This fee covers the processing of an application for mortgage insurance which may be required on certain home loans.
  • Assumption Fee:A fee which is charged when a buyer “assumes” or takes over the duty to pay the seller’s existing loan.

Closing Costs

  • Interest:  Lenders usually require that borrowers pay at the close of escrow the interest that accrues on the loan from the date of funding to the beginning of the period covered by the first monthly payment.
  • PMI (Mortgage Insurance):  Mortgage insurance protects the lender from loss due to payment default by the borrower. The lender may require the first premium or a lump sum premium, covering the life of the loan in advance, in escrow. With this insurance protection, the lender is willing to make a larger loan, thus reducing your down payment requirements.
  • Hazard Insurance Premium:  This premium prepayment is for insurance for the borrower and the lender against loss due to fire, windstorm, and natural hazards. The coverage may be included in a Homeowner’s Policy which insures against additional risks such as personal liability and theft. Often the first year’s premium is prepaid in escrow. The policy may not protect against loss caused by flooding. If your mortgage is federally insured and your property is within a special flood hazard area identified by FEMA, you may be required by federal law to carry flood insurance on your home.
  • Title Charges:  These may cover a variety of services performed by title companies and others and include fees directly related to the transfer of title and fees for recording, transfer tax, etc. The borrower may pay all, a part or none of the cost for owner’s and lender’s title insurance depending on the terms of the sales contract or local custom. A one-time premium may be charged for the lender’s title policy which protects the lender against loss due to problems or defects in connection with the title. The insurance is usually written for the amount of the mortgage loan. The borrower will be responsible for all, part or none of the cost depending on the sales contract or local custom.
  • Escrow Services:  Fees will be charged for the services preformed by the escrow officer. Typically responsibility for payment of this fee is negotiated between buyer and seller when the sales contract is signed.
  • Recording and Transfer FeesThe sales contract or local custom determines how fees are split between buyer and seller. The buyer usually pays the fees for legally recording the new deed and mortgage loan. The county charges a transfer tax and many cities also have transfer tax fees.
  • Pest and Other Inspections:  Inspections for termites or other pest infestation of the home may incur fees. Payment is determined by sales contract or custom.​​