Powerhouse Escrow Santa Clarita CA Independent


Icon FacebookTwitter Icon


(818) 891-9400

What is escrow?


Escrow is the process whereby parties to the transfer or financing of real estate deposit documents, funds, or other things of value with a neutral third party (the escrow agent), which are held in trust until a specific event or condition takes place according to specific, mutual written instructions from the parties. Escrow is essentially a clearinghouse for the receipt, exchange, and distribution of the items needed to transfer or finance real estate. When the event occurs or the condition is satisfied, a distribution or transfer takes place. When all of the elements necessary to consummate the real estate transaction have occurred, the escrow is “closed”.


Why is escrow important?


Escrow is a service that protects the public and minimizes the potential risk involved in a real estate transaction.  An experienced neutral third party in possession of the legal documents and funds, which is obligated to safeguard the instruments and funds, buyers and sellers, as well as lenders and borrowers, can safely interact with one another and be assured that no legal documents will be recorded, and no funds will be released, until all of the conditions of the real estate contract or agreement between the parties have been completed.


Who chooses the escrow holder?


The choice of escrow is normally agreed upon by the principals to a real estate transaction and reflected in writing in the purchase contract. A seller may elect to choose "ABC Company" and the buyer may choose "DEF Company," but both parties must ultimately agree, like they must on all terms and conditions of a sale. If a real estate broker is involved, it may be a common practice for the broker to recommend an escrow company, especially if the broker continually does business with a particular escrow officer or company. With a refinance transaction, if you are a borrower refinancing your property and working with a mortgage broker, it is usually the broker who will select and/or recommend an escrow provider for you. However, while a real estate broker may suggest an escrow holder, he or she may not designate an escrow holder as a condition precedent to a transaction.


When does escrow typically open and how does it work?

In the typical escrow, the principals to the real estate transaction that requires an escrow (borrower, lender, buyer and/or seller) cause escrow instructions to be created, signed, and delivered to the Escrow Officer. In the case of a real estate sale/purchase, escrow usually opens when a fully executed purchase agreement has been delivered to an escrow holder. The good faith deposit or initial down payment may or may not be deposited at the same time. The delivery of the signed purchase agreement and/or accompanying deposit to an escrow company is usually facilitated by the listing or selling broker involved. Upon receipt of a fully executed purchase contract and/or good faith deposit, the Escrow Officer will normally assign the transaction an escrow number.


When calling your Escrow Officer with questions or concerns, it is helpful to have this escrow number.  This will allow the Escrow Officer to locate your file more easily. The applicable Broker will typically provide the Escrow Officer with important information regarding the transaction, such as the names and contact information for the principals, lending and title information, selection of service providers, and other necessary details. After escrow opens, the Escrow Officer will order a real property title search with the title company designated by the parties, if this has not already been done by the listing broker, and prepare escrow instructions. These instructions are normally pre-approved by the brokers involved in the transaction. Once they are deemed to be error free and finalized, the instructions are sent to the parties for signature. These instructions essentially tell the Escrow Officer what to do and when to do it, and basically give the Escrow Officer the authority to act. It is worth pointing out that there are some aspects of a real estate transaction that are not part of the escrow. For instance, the purchase agreement contains several items that are not handled by escrow holders, such as buyer and seller agreements regarding property fixtures, personal property, removal of contingencies, liquidated damages, arbitration and mediation. It is important to remember that if you have specific questions about the purchase agreement, you should contact your licensed real estate broker or licensed attorney.


The Escrow Officer can only process the escrow in accordance with the escrow instructions. Therefore, without signed instructions, the Escrow Officer cannot act or proceed. The Escrow Officer will then perform those functions that they were authorized to do in writing by the mutual agreement of the parties to a transaction, unless an instruction(s) is unlawful and/or against the policy of the escrow holder. The required conditions, processing, and facilitation of the escrow may differ depending on the type of transaction and property involved. However, regardless of the type of escrow being performed, it is only when all of the conditions required in the escrow instructions have been satisfied that the escrow will be complete.

At the close of escrow, the Escrow Officer will release funds and documents in accordance with the escrow instructions, pay all bills as authorized, and prepare and deliver a final closing statement to the parties.


What are escrow instructions?

Escrow Instructions, which are prepared by the Escrow Officer, identify all of the terms and conditions of the escrow, as well as the escrow holder's general provisions and legal responsibilities and limitations. They are usually detailed in nature and prepare the Escrow Officer for every situation. The instructions typically identify the escrow holder's contact information and escrow number, license number, important dates including the date escrow opened, as well as the date it is scheduled to close, the names of the parties to the escrow, property address and legal description, purchase price and terms, how buyer's title is to vest, proration adjustments, matters of record to which buyer is subject when he or she acquires title, disbursements to be made, fees and charges and who is responsible for payment, documents to be signed, delivered, and recorded, and the process and roadmap that must be followed by the escrow holder in handling the escrow. Additionally, escrow instructions usually reflect the agreements made between the parties with respect to the escrow and the duties of the Escrow Officer. These duties typically include, but are not limited to, ordering the title search, requesting payoff demands and beneficiary statements, facilitating the receipt and approval of reports, making prorations and adjustments, paying bills, obtaining the buyer’s or borrower's approval and signature on loan documents, requesting closing funds and authorizing recording, closing the escrow after confirmation of recording, preparing final closing statements, disbursing funds, and delivering documents to the appropriate parties. In sum, escrow instructions indicate all of the specific steps to be completed and conditions that must be satisfied before the escrow is complete. Because an escrow holder may only act upon specific written and mutual instructions of the principals, the escrow instructions must be clear in content, accurately reflect the intention of the parties and the duties of the escrow holder, and avoid ambiguity. When fully executed by all parties, the instructions become an enforceable contract and the escrow becomes effective

As a consumer, it is important for you to know that an Escrow Officer may not solicit or accept an escrow instruction, or supplemental escrow instruction, containing any blank that can or is to be filled in after signing or initialing of such escrow instruction. An escrow officer is also prohibited from allowing any person to make any additions, deletions, or alterations to an escrow instruction unless the changes are signed or initialed by all persons who had signed or initialed the original escrow instruction prior to the modification.


What are closing costs?

Closing costs refer to and include a variety of costs incurred by either a buyer or seller in excess of the selling price of a property. They are largely determined by the terms and conditions of the contract, the type of transaction, and where the property is located. Certain fees and charges are expected regardless of the above factors. For example, in a real estate transaction, it is customary that there would be fees in connection with obtaining a new loan, paying off an old loan, fees for escrow and title, recording documents, documentary transfer taxes, real estate commissions, prepaid property taxes, home warranties, and insurance premiums. If applicable, there may also be several recurring costs or fees, or prepaid items that are prorated through escrow.  All of these fees and charges will be reflected on the Loan Estimate, Closing Disclosure, and Closing statement. 

*It should also be noted that whenever California real estate is sold or transferred, there are specific State and Federal real estate tax withholding requirements that may apply pursuant to the California Revenue and Taxation Code and/or the Internal Revenue Code, respectively.

For more information, you should visit www.ftb.ca.gov and www.irs.gov


What are prorations?

In a real estate transaction, there are usually expenses and payments that must be “prorated” (or properly distributed or divided proportionately) so that the parties are equitably responsible for amounts owed during their respective ownership of the property. For example, the seller is the beneficial owner of the property until the close of escrow, when ownership and possession is delivered to the buyer. Naturally, there are some items or expenses that have been prepaid by the seller. In order to equitably reconcile these prepaid items or recurring costs in connection with the property, the escrow holder may be instructed by the parties to prorate those expenses. Examples of these items/expenses include property taxes, rental income, security deposits, property insurance, interest, and homeowner association dues.

The items are usually prorated using the date of the close of escrow and some other "paid to" date. For example, if a seller paid $300 in homeowner association dues for the month of May and escrow were scheduled to close on May 15th, the escrow officer, if instructed, would likely prorate said dues from the close of escrow to June 1st. This proration would result in a credit (reimbursement) to the seller for the period of time he or she is no longer the owner of the property, and a debit to the buyer for the period of time that he or she has been the owner of the property and responsible for the dues. If you are a buyer or borrower and obtaining a loan, you will most likely pay a proration of mortgage interest in connection with, and as a requirement of, your new loan. If you have questions regarding the prorations of items on your estimated or final closing statement, your Escrow Officer will be able to help you.


What is a closing statement?

A closing statement is an accounting or itemized list of all of the charges and credits in connection with your escrow account which is prepared by the escrow officer. In addition to closing costs, the closing statement will reflect the purchase price and financial terms, funds deposited, debits or credits, payments to third parties, and payoffs of existing loans and/or liens. The closing statement will indicate how much money you may need to bring into the escrow or how much money you are to receive at the close of escrow.

 What is a Loan Estimate and Closing Disclosure? 
The Loan Estimate is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying, and must be provided to consumers no later than the third business day after they submit a loan application.  The Closing Disclosure, which is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form must be provided to consumers at least three business days before consummation (consummation means the time that a consumer becomes contractually obligated on a credit transaction) of the loan. The HUD-1 and final Truth-in-Lending disclosure (final TIL and, together with the initial TIL, the Truth-in-Lending forms) have been combined into the Closing Disclosure.  
How should I take Title to my property?

One of the decisions you will have to make when you are purchasing a property will be how you would like to hold title to the property. There are several different title vesting options (joint tenancy, community property, community property with right of survivorship) in California, and each one has different tax, legal, and/or estate consequences. It is wise not to rush through this part of the escrow paperwork. Rather, you should do your homework and consult a licensed attorney or tax professional if you have questions.





      Copyright 2013 - Powerhouse Escrow Corp.                      HOME           OPEN ESCROW          RESOURCES          CONTACT          ABOUT US