Asked Questions Regarding Escrow
This web page has been provided in order to inform you about some of
the aspects of escrow, including a clarification of the role of the escrow
holder and knowledge of the escrow process. This information is intended
to provide an overview of the escrow processes only.
Buying or selling a home (or other piece of real property) usually
involves the transfer of large sums of money. It may be the single biggest
investment you make in your life. Naturally you want to be sure it's
handled properly. It is imperative that the transfer of these funds and
related documents from one party to another be handled in a neutral,
secure and knowledgeable manner. For the protection of the buyer, seller
and lender, the escrow process was developed. That's the job of the escrow
professional. Through escrow your transaction can be conducted with safety
and in confidence.
What is escrow?
Escrow is a service, which provides the public with a means of
protection in the handling of funds and/or documents. Escrow enables the
buyer and the seller to transact business with each other through a
neutral party, thereby minimizing their risk.
In the escrow, all parties involved give their instructions to this
neutral intermediary, whose duty it is to assure that no funds or property
will change hands until all instructions have been carried to completion.
The escrow holder/company serves as the neutral "stakeholder"
and the communications link to all the parties in the transaction. The
escrow holder performs the following functions:
Prepares escrow instructions
Requests a preliminary title search to determine the present
condition of title to the property
Requests a beneficiary's statement if debt or obligation is to be
taken over by the buyer
Complies with lender's requirements specified in the escrow
Receives purchase funds from the buyer
Prepares or secures the deed or other documents related to the
Prorates property taxes, interest, insurance and rents according to
Secures releases of all contingencies or other conditions as imposed
on a particular escrow
Records deeds and any other documents as instructed
Requests issuance of title insurance policy
Closes escrow when all the instructions, including charges for title
insurance, recording fees, real estate commissions and loan payoffs
Prepares final statements for the parties accounting for the
disposition of all funds deposited in escrow
The Escrow Holder does not:
What types of transactions go through escrow?
Most contracts that involve the transfer, lease or financing of real
or personal property can be placed in escrow. You may be involved in
escrow not only when you buy or sell a home, but also when you buy a
mobile home, sell a business or transfer stock in a closely held business.
Prizefighters have even been known to have their purses guaranteed through
an escrow depository. The buyer or seller should demand the protection of
escrow for any transaction, which involves a substantial investment.
Why do I need escrow?
Whether you are the buyer or the seller, lender, or borrower, you want
the assurance that no funds or property will change hands until all
of the instructions in the transaction have been followed. The escrow
holder has the obligation to safeguard the funds and/or documents while
they are in the possession of the escrow holder, and to disburse funds
and/or convey title only when all provisions of the escrow have been
complied with. With the increasing complexity of business, law and tax
structures, it takes a trained professional to supervise the transaction.
Who handles the escrow transaction?
The escrow officer is a trained and experienced professional. He or
she can provide you with the assistance required to close your transaction
quickly and effectively. This professional person may, under the terms of
the instructions, make the decision that the conditions of escrow have
been met, and then order the transfer of the affected real or personal
property to the interested parties.
How does escrow work?
The principals to the escrow (the buyer, seller, lender, borrower) -
cause escrow instructions, most usually in writing, to be created, signed
and delivered to the escrow officer. If a broker is involved, he will
normally provide the escrow officer with the information necessary for the
preparation of your escrow instructions and documents. The escrow officer
will process the escrow, in accordance with the escrow instructions, and
when all conditions required in the escrow can be met or achieved, the
escrow will be "closed". Each escrow, although following a
similar pattern, will be different in some respects, as it deals with your
property and the transaction at hand. The duties of an escrow holder
Following the instructions given by the principals and parties to
the transaction in a timely manner
Handling the funds and/or documents in accordance with instructions:
paying all bills as authorized
Responding to authorized requests from the principals
Closing the escrow only when all terms and conditions have been met
Distributing the funds in accordance with instructions and provide
an accounting for them in the Closing or Settlement Statement.
What do I have to do while in escrow?
The key to any transaction as important as your sale, purchase or
loan, is to read and understand your escrow instructions. If you do not
understand them, you should ask your escrow officer to explain the
instructions. Your escrow officer is not an attorney and cannot practice
law; you should consult your lawyer for legal advice. Do not expect your
escrow officer to advise you as to whether or not you have a "good
deal" or are doing things the right way. The escrow officer is there
to follow the instructions given by the principals in the escrow.
In order to expedite the closing of the escrow, you should ask your
escrow officer the question "What can I do to expedite the closing of
this escrow?" Respond quickly to correspondence. This will assist in
the timely closing of the transaction. If you are required to deliver
funds into the escrow, make sure that you provide "good" funds
in the form required by the escrow officer. Company procedures differ in
this regard, and there are ways that you can help at the time of closing;
check with your escrow officer. Do not give the escrow officer a personal
check and expect the escrow to close immediately; the escrow can only
close on cleared funds, and the processing of a personal check can take
days, possibly even a week or more.
When the escrow officer closes the escrow, some of you may want the
closing papers, checks, title policies, statements, etc. made available
immediately. There are many aspects to the closing of the escrow, and some
of these cannot be processed on the day of the closing; they may take
several days. If you have a special need, for example a cashier's check on
the day of closing, you should communicate that need to the escrow officer
early in the processing of the escrow.
What about escrow and my new loan?
If you are obtaining a new loan, your escrow officer will be in touch
with the lender who will need copies of the escrow instructions, the
preliminary title report, and any other documents escrow could supply. In
the processing and the closing of the escrow, the escrow holder is
obligated to comply with the lender's instructions. It has become a
practice of some lenders to forward their loan documents to escrow for
signing. You should be aware that these papers are lender's documents and
cannot be explained or interpreted by the escrow officer. You have the
option of requesting a representative from the lender's office to be
present for explanation, or arrange to meet with your lender to sign the
documents in their office.
What is a closing statement?
A closing statement is an accounting, in writing, prepared at the
close of escrow which sets forth the charges and credits of your account.
The items shown on the statement will reflect the purchase price, the
funds deposited or credited to your account, payoffs on existing
encumbrances and/or liens, the costs for all services and a determination
of the funds you are entitled to at the close of the escrow. When you
receive your closing papers, review the closing statement; it is extremely
logical and reflects the financial aspects of your transaction. If
anything does not make sense to you, you should ask your escrow officer
for an explanation. When going through your closing papers, examine all of
them; there may even be a refund check hiding in there. Cash the check
quickly, please. Be sure to have the check properly endorsed. All payees
must endorse the check. This will eliminate the check being returned
unpaid due to irregular or missing endorsements.
How long should I keep my escrow papers?
Your closing statement and all other escrow papers should be kept
virtually forever for income tax purposes. Your accountant will need the
information about the sale or purchase of the property. The IRS and other
agencies may require you to prove your costs and/or profit on the sale of
any property. The closing statement will assist in this task. Do not rely
on your escrow holder retaining the escrow file so that you can always
call and get copies of the closing statement. Most escrow holders will be
destroying the files after the statutory retention period, usually five
years. Maintaining and storing the closed escrow files is a costly
endeavor to the escrow holder, therefore, a nominal fee may be charged by
your escrow holder for the retrieval of a file from storage, photocopying
the requested documents and returning the file to storage.
What fees and costs will be charged?
Escrow fees are not regulated by the State. Escrow holders, like any
other business, will charge fees that are commensurate with the costs of
producing the service, the liability undertaken, and the overhead expenses
which include a profit factor. Therefore, the fees will vary between
companies and from county to county. Normally, the escrow holder will
follow its minimum fee schedule, which will provide for extra charges
based upon the differing elements of your escrow. On occasions, an
additional fee will be charged for unusual expenditures of time on a given
transaction. The escrow holder has no control over the costs of other
services that are obtained, such as the title insurance policy, the
lender's charges, insurance, recording charges, etc. Your escrow officer,
upon request, can provide you with an estimate of the escrow fees and
costs as well as fees charged by others, provided such information is
What about cancellations?
No escrow is opened with the intention that it will cancel, but there
are occasions when a contingency cannot be met or when the parties
disagree during the period of the escrow. Some escrow holders provide for
such an event by incorporating an instruction in the typed or printed
General Provisions. Ordinarily, an escrow holder will take the position
that no funds on deposit can be refunded until the escrow holder is in
receipt of mutual cancellation instructions signed by the principals. The
escrow holder cannot normally make a determination as to who is the
"rightful" party in a dispute on a cancellation and therefore
will not return the funds or documents until the principals agree; the
escrow holder is not a judge. Do expect to be charged a cancellation fee,
as this is a charge for professional services rendered and quite often for
several "out of pocket" expenses that have been incurred on the
client's behalf. These fees can vary from company to company depending
upon their policies. Sometimes, when a dispute exists, the escrow holder
may be forced to allow a court to decide which party is entitled to what
documents or funds; this is called an Interpleader Action. Fortunately,
most disputes are resolved before the Interpleader is filed, as the costs
for such legal actions are extreme. Those costs, incidentally, are
normally paid out of the funds on deposit in the escrow.
What about Title Insurance?
Title insurance is usually obtained when real property is purchased.
The policy of title insurance insures the owner and/or the lender of
ownership of the property. There are various coverages afforded, but a
basic policy insures that the buyer is the owner and that any lender shown
on the policy is an "insured" lender. Many different types of
extended coverages are available; for example, an ALTA policy is quite
often required by institutional lenders to afford them additional
protection under the title insurance policy. The title policy is written
after an extensive examination of the public records is made and the
recording of the required documents as called for in the escrow. The title
insurance policy fee is a one-time fee, paid at the close of escrow. The
determination of who pays for the policy is not uniform from county to
county in California. In some counties, the buyer will pay while in others
the seller will pay. In other counties the seller will pay for the owner's
policy and the buyer will pay for the lender's title policy. But in almost
every case, the question of who pays closing costs is a matter of
agreement between the parties. Usually this agreement is based on the
customary practice in your county or area. In the case of some FHA or VA
transactions, the escrow officer must follow the guidelines as required by
the lender and/ or government.
What about property taxes?
The terms of your transaction and the resultant escrow instructions
determine how the property taxes will be handled. If there is no mention
of the proration of taxes, your escrow officer will not deal with any
credits or charges for prorated taxes. However, if your escrow calls for a
proration of taxes, there will be an item in your closing statement that
will reflect either a credit or charge to your account. If the taxes are
not paid (even though there has been a credit or charge against your
account), the buyer is obligated to obtain a tax bill and pay the taxes.
If the buyer does not have a tax bill with which to pay the taxes, you can
request a bill from the Tax Collector; send a photocopy of the deed.
Supplemental Property Taxes is another concern of the buyer. Upon transfer
of real property, a supplemental tax bill is generated. This is
accomplished in cooperation with the County Assessor and the County Tax
Collector. Shortly after the close of an escrow involving the conveyance
of real property, the County Assessor will request information about the
property from the buyer. This information assists the Assessor in
determining the value of the property for taxation purposes. The escrow
holder may have previously supplied some of the information at the time of
the closing of the escrow, via the Preliminary Change of Ownership form
that should accompany each deed when it is recorded.
Does the perfect escrow exist?
Perfection is difficult to achieve, especially in dealing with the
complexities of the escrow, the desires of the parties and other matters
that are sometimes far beyond the control of the escrow officer. It is
human nature to err on occasion, but your escrow officer has the
background, training, education, support and systems in place necessary in
order to accomplish the objectives of the escrow instructions. In the
event you have any problems in the handling of your escrow, you should
first contact the escrow officer. If your problem is not resolved, you
should next contact the management or owner of the company. If the matter
requires additional attention, you can call the proper regulatory agency.
a buyer entering into escrow, what must I do?
If the transaction is contingent upon a new loan, it is your
responsibility to arrange this loan. Your real estate agent can be most
helpful in obtaining a lender, since he or she is more knowledgeable about
which lenders are currently active and their financing terms.
The instructions are ready--now what?
When the escrow instructions have been prepared, read them carefully
to determine that they are complete and properly reflect your total
agreement. If you have any questions or corrections, discuss them with the
escrow holder before signing. Once the instructions have been signed, they
become the basis for the conduct of the escrow.
Can I get legal advice from the escrow officer?
An escrow officer is not a legal counselor and cannot give you advice.
Remember, the purpose of escrow is to take, and comply with, instructions
to carry out the mutual agreement of the principals. In the event of
disagreement of the parties, the escrow officer must remain neutral until
agreement is reached. The transaction should not be negotiated in the
escrow office, nor should an escrow officer become involved in the
If I still have questions about the transaction, where can I go for
If negotiations have been conducted through a real estate agent, that
person, or his/her broker, should be your primary consultant. The role as
an independent agent prohibits the escrow officer from answering many of
your questions. However, a knowledgeable escrow officer, whose
responsibility is giving impartial service to all the parties, will refer
you to the proper source for your answers. An escrow officer will often
suggest that the customer seek the advice of legal counsel or a tax
What happens at the closing?
When instructions of all parties to the escrow have been carried out,
the closing can take place. All outstanding funds are collected at this
time and all costs must be paid. Title to the property, whether real or
personal, will then be transferred. All specified documents are recorded
or filed at this time.
What fees must I pay at closing?
Fees and charges are controlled by many factors and depend largely
upon the type of transaction and the terms of your agreement. However,
there are certain charges, which are considered to be normal. These would
include fees charged by a lender in connection with obtaining a new loan
or in paying off the old one. They may also include recording fees, title
insurance policy premium, documentary transfer taxes, prepaid taxes and
insurance and escrow fees. Your escrow officer will provide your with an
Your closing funds should be in the form of a wire transfer or a
cashier's check made payable to the escrow holder in the amount requested.
Do not bring a personal check to close a transaction. It will only delay
the closing, since the funds must be collected before the closing can take
place. An out-of-town check can cause a week to ten days delay in closing.
As a seller entering into escrow, what must I do?
To be fully prepared when you enter the transaction, you should have
sufficient information relative to your ownership available. This would
include information concerning any loans, taxes, insurance and, if
appropriate, rental data. Items that would be the sources of this
information are your original deed or title policy, fire insurance policy
and a year-end statement from the existing lender. A copy of the most
recent structural pest control report may be helpful, or in some cases
even required, in a real estate transaction.
What is the fee for the escrow service?
The escrow fee is normally based on the size and complexity of the
transaction. Since there are so many types of escrows and every
transaction is different, there are no set fees. Usually the escrow fee is
divided in accordance with the agreement of the parties.
The closing is complete--now what?
Upon closing, review the closing statement to determine that the costs
were allocated in accordance with your instructions. It normally takes a
period of time after closing before the hazard and title insurance
policies can be delivered to you. Any recorded documents to which you are
entitled will be mailed to you after the escrow has closed. Frequently
these documents will come to you directly from the office of the recorder
or the Secretary of State in the case of personal property filing.
What if the transaction isn't completed? Is my deposit refundable?
Who pays the fees?
When a transaction fails to close, a cancellation agreement must be
reached between the parties. This cancellation agreement must be put in
the form of a written instruction, just as your contract was. Since the
deposit is part of the escrow contract, both the buyer and the seller must
mutually agree to its disposition. Instructions for the disposition of
this deposit should include, among other things, provisions for payment of
charges incurred during the escrow. This would include fees and costs
incurred by the escrow holder and charges such as loan processing and
title insurance fees as specified in the escrow instructions.
The escrow officer does . . .
Serve as the communication link to all parties in the transaction.
Prepare escrow instructions.
Request a preliminary title search to determine the basis upon which
a title insurance policy may be issued.
Request a beneficiary's statement or pay-off demand relating to
Comply with lender's requirements, specified in escrow agreement.
Receive purchase funds from the buyer.
Prepare or secure the deed or other documents related to escrow.
Prorate taxes, interest, insurance and rents according to
Secure releases of all contingencies or other conditions as imposed
on any particular escrow.
Record deeds and any other documents as instructed.
Request issuance of the title insurance policy.
Close escrow when all of the instructions of buyer and seller have
been carried out.
Disburse funds as authorized by instructions, including charges for
title insurance, recording fees, real estate commissions and loan
Prepare final statements for the parties accounting for the
disposition of all funds deposited in escrow.