Depending on where you live in the United States, escrow, closing, or settlement all refer to the same thing – the last part of the home sale process where one party receives payment for the home and the other receives the deed to the home.
To facilitate this process, an impartial third party is involved who’s called an escrow agent in the western U.S. Closings in other parts of the country are conducted by lenders, title insurance companies, real estate brokers, or attorneys.
Opening Escrow (For brevity, this term will be used to refer to closing and settlement as well)
Escrow is opened after the buyer and seller sign a purchase agreement and a deposit is given.
The buyer or the seller can open escrow.
Escrow is opened by taking the purchase agreement and deposit to an escrow company, title company, real estate broker or attorney for safe keeping and processing.
The escrow agent’s – title company, escrow company, real estate broker, or attorney - principal task is to make sure the property’s transfer of ownership from the seller to the buyer is completed according to the terms written in the purchase contract which was agreed upon by everyone involved in the sale.
Escrow Officer’s Role
The role of the escrow officer, or agent, is to follow the written instructions specified in the purchase agreement in order to complete the sale and administer the close within the time specified.
The escrow agent has several duties:
Follow the written instructions specified in the purchase agreement.
This may also include working with the lender who processes the loan. The lender may even request the loan documents be signed at the escrow office.
Once the title to the property is cleared and the buyer has obtained the funds, the parties will meet in the escrow agent’s office to sign the appropriate documents.
The sale is then completed and escrow is closed.
Both the seller and buyer agree on the close date at the time they sign the purchase agreement.
The close date is generally 30 days to 90 days out, although escrow can close in a shorter amount of time as well, especially if it’s a cash purchase.
When selecting the close date, the buyer and seller need to determine if the date chosen gives them enough time to complete the tasks necessary to close the sale.
For the buyer, that may be:
Obtaining financing – the buyer should set the date before the expiration of the lender’s lock-in date for the interest rate
Property inspections which may show items that need to be repaired or credited
Title report review
Time to sell current home and move
For the seller that may be:
Time to find a new home and move out of current home
Making repairs if the property inspection warrants them
Clearing title to the property – there may be an unexpected lien, or other unknown problems
For both buyer and seller, there may be other factors to consider such as:
One of the parties being out of town at the time of the signing
Legal problems that may arise in a complicated sale
It’s important to keep the escrow officer informed of date changes since interest, insurance, and taxes will be calculated and prorated right up to the day of close.
How Much Does Escrow Cost?
Escrow fees generally cost about 1- 2 % of the purchase price but this varies not only state by state but community by community as well.
This fee is in addition to the sales commission if there is one.
Who pays depends on where you live in the United States. In some places the two parties share the cost; in others, either the buyer, or the seller pays.
You can learn more about the statewide differences by going to .
What is Included in the Closing Fees?
The closing fees may include: appraisal, credit report, lender’s inspection fee, mortgage insurance application fee, mortgage broker fee, pre-payment of accrued interest, mortgage insurance and hazard insurance, title search, title insurance, document preparation, transfer taxes; notary fees; recording fees; re-conveyance fees; pro-rations, and settlement or closing fee.
Here’s a copy of the HUD-1 statement of fees you’re likely to receive: .
There may be additional fees if complications arise during the close.
Be sure to question any fee that doesn’t look right.
Shopping for Escrow Agent
If you are buying or selling ‘by owner’ then you should pick an escrow company that is comfortable with ‘by owner’ transactions.
Escrow fees do vary state by state, and within communities, so you should shop for the best escrow fees just like you’d shop for the best loan.
Some of the fees can be negotiated so be sure to review them with the escrow officer.
You can get a list of escrow companies by looking online or in the phone book under escrow companies, title companies, or real estate attorneys.
Two national organizations to check are the American Escrow Association at and the American Land Title Association at .
Like anything else, you should check out three companies, get references and avoid the lowest priced company.
Be sure to ask what services will be included in the escrow fees and what services will require an extra charge.
It’s best to do this online so you don’t get involved in a sales pitch. Any reputable company should be willing to give an estimate of its fees.
If your state requires you to work with any attorney, you would follow the same procedure.
A Portion of the Escrow Fee is Tax Deductible
Fees that are immediately tax deductible are: interest, points, loan origination fees, property taxes and any pre-payment penalties.
Fees that are tax deductible when you sell your home are: title insurance premiums, attorney fees if there are any, appraisal fees, recording fees, notary fees, escrow fees, transfer taxes, and termite clearance costs.
Mike Forkin of First American Title assisted with this article.