Closing on a house is the most exciting day in any real estate transaction because it's when you get the keys and get to take possession of your property. Congratulations, you’re a homeowner. Many times, when you close on a home, the technical term for it is “close of escrow.”
This article will go over what a close of escrow is, how it works, what happens after you close escrow and several FAQs. By the time we’re done, you should feel confident in the knowledge and ready to buy a home.
What Is Close Of Escrow?
Escrow has a couple of different definitions in real estate. For most people, general awareness of escrow is around the fact that it’s an account used to hold monthly payments for property taxes, homeowners insurance and (if applicable) mortgage insurance. Most homeowners have this type of escrow account and it’s typically required if you make a down payment of less than 20% or have an FHA or USDA loan, for example. But there’s yet another type of escrow.
When closing on your home, a separate escrow account is typically used to hold several items in between the time the transaction is agreed to and the financing of the home is secured. A buyer puts down a deposit on the home. In exchange, a seller agrees to give the buyer time to do what they need to do to secure financing (appraisal, providing final financial documentation to a lender, etc.) and a home inspection.
Assuming all goes well, the buyer and seller may agree to close the transaction anywhere between 30 – 60 days later. Within that broader time frame, the buyer may have certain deadlines in the contract by which time they have to have the appraisal or home inspection completed, for example.
The close of escrow comes into play when it’s actually time to finish the transaction and the new homeowner takes possession of the property from the seller. The advantage of the escrow account is that the seller doesn’t necessarily have to be there. Documents for the transfer of ownership can be signed and given to the escrow agent, a third-party facilitator.
Close of escrow will take place in the majority of real estate transactions. Most people who buy a home are doing so with a mortgage, so it’ll be necessary to have a waiting period to secure financing. Even if you’re buying with cash, you might put down a deposit in order to give you time to inspect the home and look for major red flags.
What Happens During Close Of Escrow?
Close of escrow may or may not take place on the actual date of closing. Regardless of when it happens, there are several steps to making the transaction official.
When the purchase agreement is signed, a buyer provides an earnest money deposit (also known as a good faith deposit), a fixed or percentage-based amount that shows they’re serious about buying a home. This goes into escrow.
At this point, a seller can take this step of signing documents related to the official transfer of ownership including the deed and title, along with providing any funds related to negotiated seller concessions and real estate commission. If the buyer is to take possession immediately on the closing date, a copy of the keys may be included as well.
The documents, funds and keys are left under the custodianship of the escrow agent who serves as the third party. They’re responsible for ensuring the proper disbursal of funds and helping the buyer and seller fill out and file transactional documents.
What Happens After Close Of Escrow?
Once the above steps have taken place, escrow has been closed, but the transaction isn’t finished. Regardless of whether the seller is around on closing day, several things still happen to seal the deal.
First, the buyer has the opportunity to conduct a final walk-through of the property. It’s unlikely that anything is going to go sideways at this point, but it’s good to get a final look.
Beyond that, down payment is made to the lender and closing costs are paid. The earnest money is released from the escrow account and the lender cuts the seller a single big check. Unless the buyer and seller have otherwise negotiated, the buyer takes official possession of the property on the actual date of closing.
Close Of Escrow FAQs
While those are the basics of close of escrow, you may have other questions. Let’s answer a few of the most frequent here.
What Are Some Problems That Can Take Place During Close Of Escrow?
There are problems that happen during the process of closing escrow. In fact, part of the reason close of escrow works the way it does is to resolve these problems before the transaction becomes official. Here are some of the most common problems and how they’re resolved:
- Delays: One of the biggest things that can cause an issue are delays in the process. For whatever reason, it might be taking longer than anticipated to get an appraisal back or schedule a home inspection. If a seller believes a buyer is operating in good faith, it’s possible to renegotiate the timeline for closing.
- Contingencies: As part of a purchase agreement, a buyer and their real estate agent will typically insert clauses whereby the buyer can walk away from the transaction and get their deposit back. Common contingency clauses include the appraisal coming back lower than expected or the home inspection showing a major defect (e.g. HVAC system or roof needing replacement required). There’s also sometimes a financing contingency if the mortgage falls through. It’s worth noting that most of the time these things can be worked out before anyone walks away if the seller agrees to lower the sale price or make repairs.
- Title: If there are things on the title like a lien that’s going to be a problem after the sale or encumbrance that needs to be figured out, it can take longer to get a clear title and get title insurance lined up.
How Long After Close Of Escrow Can I Move In?
How long you have to wait before you can move in depends on terms laid out in your purchase agreement. In most cases, unless there’s a specific clause in the contract, you can move in when the transaction has been completed with your mortgage company. As soon as you sign all the documentation, it’s yours.
Sometimes sellers will ask for more time before they move out. This is negotiated in the purchase agreement. If you agree to give them more time, you have to abide by the contract. In exchange, the seller usually pays rent for the amount of time they remain in the home after closing.
Can I Buy A Home Warranty After Close Of Escrow?
A home warranty is coverage for appliance and/or home system repair and replacement. The difference between a home warranty and a traditional warranty is that the coverage is based on the type of appliance or system rather than being tied to a specific manufacturer. You also pay for the coverage on a monthly basis, so this is best for people who want to spread out the amount that they would be spending on maintenance rather than getting a big repair or replacement bill down the line.
In order to get a home warranty, your purchase has to be complete with the title and deed in your name.
Close Of Escrow Vs. Closing Date: What’s The Difference?
Close of escrow and your closing date could be the same day if the seller is there for your closing. However, it could be a different day altogether.
The best way to think of this is that the close of escrow is the day that you and the seller fulfill your obligations to each other. If you provide your earnest money to the third party and the seller does the same with title documents and – unless the contract allows them to stay for a length of time – the keys, your responsibilities to each other are taken care of. Escrow is closed.
However, you could close on your mortgage and take possession of the title, deed and keys from the escrow agent on a completely separate day. This is your closing date and the seller doesn’t have to be present.
What Is A Closing Extension?
A closing extension is when you and the seller agree that your closing date can be pushed back beyond a time specified in the contract. Sellers have a vested interest in this because regardless of whether your escrow has closed or not, they don’t get the money from the sale until you’ve finalized your financing with the mortgage company and closed.
Your closing could be postponed for any number of reasons, including delays getting an appraisal or home inspection done as well as bigger concerns like natural disasters. Whatever the case, communication is key and you or your real estate agent can work with the sellers and their real estate agent to amicably reschedule so that you don’t lose your opportunity at the home.
The Bottom Line
Close of escrow is the point in the real estate transaction when you and the seller have honored your responsibilities to each other. This may or may not take place on the same day as your closing date with your mortgage lender.
Close of escrow occurs when two things have happened: You’ve given your earnest money to the escrow agent and the seller has signed documents related to the property transfer, including title and deed. The buyer then gets these documents once they’ve closed the financing for the transaction and paid any applicable down payment and closing costs.
Some things that can delay the close of escrow are the failure to pass hurdles imposed by contingency clauses like appraisal and home inspection. However, typically these are resolved through negotiation. Unless your purchase agreement gives the seller the right to occupy the property for a certain amount of time, you can move in once you’ve closed your financing. That’s the same time you can purchase home warranty coverage if you choose. If for some reason it will take longer to close your mortgage financing, you and the seller may have to negotiate a closing extension.