Buying a Home
Escrow, Inspections, & Appraisals -
ESCROW: Now that you've found your perfect house and with the help of your real estate agent, you submitted an offer to purchase the home and it was accepted - now what? Now we open escrow and start the process of transferring the ownership of the property from the seller to the you - the buyer. But there are a few steps that need to be completed along the way.
First of all - what is escrow? Escrow is when an impartial third party holds on to something of value during a transaction. When you make an offer on a home, you will almost always be required to deposit what is called earnest money (think of it as an indicator of how serious you are in seeing the transaction get completed and also a "mini-down payment"), that will be placed in “escrow.” That means it isn’t going directly to the seller but is being held by an impartial third party until you and the seller negotiate a contract and close the deal. You can’t touch it and the seller can’t touch it. It’s in escrow.
That’s important because it protects both parties. Say you put down earnest money that went directly to the seller and then couldn’t reach a final purchase and sale agreement. You don’t want the seller holding your earnest money hostage as a negotiating ploy. Likewise, the seller won’t want to sign over the deed to the home until you’ve paid for it. And you won’t want to hand over cash without the deed being signed. Escrow ensures everyone gets what they are due at essentially the same time.
What about closing costs? Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller. Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.
Your lender will give you a Loan Estimate for your loan, which will include what the closing costs on your home will be, within three business days of receiving your completed loan application. But these are just an estimate, and many of the fees listed can change. If they do change, you may receive a revised Loan Estimate so there are no surprises along the way.
At least three business days before your closing, the lender should give you a Closing Disclosure statement, which outlines closing fees. Compare this to your Loan Estimate and ask the lender to explain what each line item on your closing costs is and why it is needed. There are limitations on the amount a number of fees can increase from the Loan Estimate to the Closing Disclosure so there really shouldn’t be any surprises on closing day. But if there are, you can still walk away at closing.
Escrow and closing. Finally, you may hear someone refer to the “closing of escrow.” That’s when your purchase is completed. A closing or “escrow officer” will oversee the final paperwork and handle the exchange of funds and recording of deeds. This person, sometimes an attorney, will ensure that all the money is properly disbursed, that the documents are signed and recorded, and that all necessary conditions are met before closing the escrow.
INSPECTIONS: Inspection day is often one of the most exciting moments of home buying because it’s likely the first chance you have to go inside the home since you made your offer. It’s also usually the last chance you’ll have until a final walkthrough. But more importantly, it’s your opportunity to make sure you know what you’re getting yourself into when it comes to the condition of the home.
Home inspections can be reassuring, fun and exhausting all at the same time.
Home inspections don’t just provide you with a list of problems you want to negotiate with the seller to fix or something catastrophic that makes you back out of the deal altogether. It will provide you a detailed report that is something of a “new owner’s manual” for the home. It will include maintenance tips and schedules you should follow.
You should plan on being there and your agent should be right there with you the entire time. Chances are the seller’s agent will be there too, to help get any quick answers the inspector might need. Block off the entire morning or afternoon. Home inspections take time and you don’t want to rush through it. During this time, follow along as much as you can. You don’t have to follow the inspector into the crawlspace – they bring protective clothing just for that – but anyplace reasonably accessible, you should go too.
You aren’t being a pest. (That’s a different inspection altogether. If you have any reason for concern, hire an additional pest inspection.) You’re being a student. Inspectors will explain your home’s systems and give you maintenance tips. Those should also be in the final report, along with pictures. But hearing and seeing it in person is helpful. The day of inspection will probably feel like a whirlwind of activity. You may be a little nervous about what the inspector will find. It will help if you make like a Boy Scout: Be Prepared.
And as always - the seller is not required to make any repairs or concessions, after a home inspection has been completed. However, the sale of the home is relying on two counterparts acting cohesively towards a common goal - the purchase and sale of the home, and you as the buyer - can cancel the contract if still within your contingency period.
APPRAISALS: How Do Appraisals Affect Your Home Loan?
When buying a home, your appraisal can play a role in determining if your lender will approve your loan. All lenders order an appraisal during the mortgage process in order to assess the home’s market value and make sure the borrower is not attempting to borrow more money than the house is worth.
If your appraisal comes in below the purchase price of your home, you may need to pay the difference in cash, lower the purchase price, or get a second opinion.
Your home appraisal can also affect your home loan during a refinance. It can play a big role in the interest rate that you get, since the appraisal helps determine your LTV (loan-to-value) ratio. For example, if the LTV ratio is 75% or lower, you could get a lower rate, because the loan is seen as less risky to the lender. If the value of the home increases after you close on your home purchase, you may be able to refinance to a lower interest rate