How Long is Escrow | A Primer on Real Estate Transactions
If you’re just entering the real estate world, you may have heard of a process called escrow. Escrow is an essential step of every real estate transaction. Today, we’ll talk about what escrow is exactly and how long escrow takes.
There’s no definite time for any given escrow, but in short–the typical escrow process is usually 30-45 days long.
What is Escrow?
To put it simply, escrow is a process buyers and sellers of a property enter into once an offer from the buyer has been accepted by the seller.
Strictly defining what escrow is, it can be interpreted as a third party bank account. Usually, there’s a specific company and professionals who handle money that enters and leaves an escrow account. Think of an escrow account as a third party account that is used when handling money between the buyer and seller of a large transaction.
How does escrow begin or start?
The “escrow period” typically starts when an offer from the buyer is accepted by the seller and an initial “earnest money deposit”, or a good faith deposit, is transferred to the escrow account.
When a buyer makes a good faith deposit, it shows the seller that the buyer is serious and the deposit stays in the escrow account until the entire transaction is finished. It then gets credited to the final sales price, net of any other closing costs (of which there are plenty).
Why is escrow needed?
A single family residence in a suburban part of Los Angeles
Escrow is needed because in large and complicated transactions (in this case, a real estate transaction), it can be risky for fraud to occur and also a lot of confusion may occur between buyers and sellers. As a safety measure for both buyers and sellers, an escrow company and professionals handle all money that is exchanged. This can include an initial money deposit from the buyer (when they make an offer on a house), and also any other closing/interim costs that are part of the real estate transaction. Some other closing costs in a real estate transaction are:
Title insurance fees
Loan origination fees
Property taxes
Credits from seller
Repairs
In sum, “escrow” and “escrow companies” are just neutral third party individuals and entities that protect both the buyers and sellers’ money during a complicated and large transaction.
What are the steps and timeline in escrow?
1. Pre-Escrow: Negotiation of Offer and Contingencies (1-3 days)
Before the actual escrow period begins, an offer has to be made by the buyer and accepted by the seller. At the same time, the offer will also include other items called “contingencies” which dictate other terms that the buyer and seller has to agree to. This process can take anywhere from 1-3 days with back and forth (counteroffers).
It’s worth noting that typically before a buyer makes an offer, the buyer has gotten a pre approval letter from their lender or bank, which gives the seller confidence that a buyer actually has the funds, or can get a loan in the right amount to purchase the home.
2. Fund Deposit and Create Escrow Account (5-7 days)
Once the offer is accepted, the buyer deposits their “good faith deposit”, or earnest money deposit, into an escrow account. The escrow process then officially begins, and the escrow account is managed by a third party provider. Note that the third party provider can be an escrow company, a law firm, title company, or even bank. Typically the escrow company makes money by taking a 1-2% fee from the transaction.
3. Schedule Inspections and Appraisals (8-21 days)
Once the escrow process formally begins, typically the first step for the buyer is to schedule a home inspection with an inspection company/inspector. The inspector then visits the home and conducts a detailed check of the entire home, checking for faults and defects in things like:
structural integrity
utility functionality
age/wear and tear
code adherence
leaks or other integrity concerns
In addition to the home inspection, there is usually other more specialized inspections for pests (termite, etc.), foundation and roof, or environmental (like lead, mold or asbestos)
Secondly, if the buyer is getting a loan, the lender will want to send an appraiser to the property to make sure that the property is actually worth at least as much as the loan that the buyer has to take out. This is to protect the lender from not getting paid back. If the buyer defaults on their loan, then the lender can at least recoup their loan from seizing the property.
4. Get Final Loan Approval (14-28 days)
After the inspections and appraisals are done, the buyer must get final approval from their lender or bank on the loan amount. This is different from the preapproval process and is a more lengthy process that actually guarantees the buyer is able to take out the necessary loan.
Typically, the bank or lender relies on the value of the target property, and also the buyer’s other credentials such as:
creditworthiness
income level
debt to income ratio (how much debt compared to how much income)
other assets (like cash, other bank accounts, or other properties)
5. Get Funding from Lender (29-43 days)
The final process before the actual funds are transferred to escrow, includes some time to allow buyers to get homeowner’s insurance. At the same time, lenders will typically run a title search to protect themselves (and the buyer) from a clouded title. Sometimes, the right to ownership on a property actually isn’t clear-cut, so the title search prevents any unpredicted circumstances to delay loan funding.
Lastly, if everything checks out, the lender or bank sends the money to escrow and the final closing process begins.
6. Final Closing Costs and Walkthrough
The last few days in escrow can be daunting. The buyer conducts what’s called a “final walk through” for one last chance to look through the property. This is a good time to make sure everything that the buyer has requested be repaired, was actually repaired. At the same time, the buyer should make sure that the property is in the same condition as when they initially saw the property.
After the final walkthrough is verified and agreed upon between buyer and seller, the buyer can then release final payments to escrow for their down payment and other closing costs/fees.
7. Closing of Escrow
On closing day, the buyer and seller will sign many remaining documents to finalize the sale and the escrow agent also disburses the funds from the lender, and other parties. The deed transfer is recorded and the keys are exchanged.
What Happens if Escrow is Delayed?
Common delays in escrows include:
Appraisal: Sometimes appraisers get really busy and cannot schedule a fitting appointment, which can cause a delay for the escrow. Also, there are times when the appraisal comes in significantly lower than the market price, which would be a risk to the lender and could also delay escrow.
Contingencies: Contingencies are items that must be resolved to close the transactions. Sometimes, certain contingencies are unable to be resolved, causing delays or even complete cancellation escrow. Other times, it could be a simple delay, like when a buyer must sell their current home to purchase the new one.
Loan Approval: Many escrows are delayed or fall through due to the buyer not being able to secure the loan at the amount required. This is why a higher down payment on an offer can be considered a stronger offer, because there’s less risk of a deal falling through.
Repairs: Scheduling and finding the right contractors to make repairs, especially if major, can be time consuming and could cause delays
Clouded title or issues: Sometimes, there are issues with the ownership of the property (title) and that can cause serious delays or even cancellation of deals.
FAQs:
How long does money stay in escrow?
The escrow process and money usually remains in the process for about 30 - 45 days. Depending on the qualifications of the buyer and sellers and what is requested, escrow periods can vary. In an ideal scenario, escrow usually takes about 30 days.
What is the fastest escrow can close?
Usually, the fastest escrow can take if there is financing (a loan) involved is around 30 days. If all parties are effective at communication and nothing goes wrong, 30 days is a relatively quick escrow. In an all-cash deal, escrow can close as quick as 7-14 days.
What is the shortest escrow period?
A 30 day escrow period would be considered ideal and quick. In an all-cash deal, sometimes contingencies are waived and escrow can be as short as 7-14 days.
