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The San Diego Real Estate BLOG
Buying a Home #3:
Types of Escrows
Here at the Yarbrough Group, we make the home buying process as easy as possible.
Now that you have taken the time to get pre-approved, found a home that you loved, submitted an offer and had it accepted, it is now time to begin the escrow process.
People can get hung up on this step since it seems like a lot of math and “legal gargon,” but it is actually quite a strait-forward process. In the context of buying a home, “escrow” is simply a contractual arrangement in which a neutral third party “holds the money” and the deed for both sides of a business transaction, ensures all the requirements of the contract have been met by both parties, and then eventually then releases the money to the seller and the deed to the buyer to complete the transaction.
This week on the San Diego Real Estate BLOG, we present the third post in our series on the home buying process that explains the various types of escrows that are available and how they work. There are more types of escrows available than we list here, but we will be focusing on those that a typical home buyer in San Diego would use.
If you you missed the first few posts in our series on the home buying process, you can catch up here:
Buying A Home #1: Getting Pre-Approved
Residential Sale Escrow
This is the most basic type of escrow and the one used most typically in the sale of a residential home such a single family, multifamily structure, condominiums, or townhome. This type of escrow is used when there are no extenuating circumstances or special requirements for the sale of the home such as a short sale or a foreclosure.
New Construction Escrow
This type of escrow is very similar to a standard escrow except that it is used when the home being purchased is newly built. New homes and housing developments often have additional fees attached relating to the installation of the home’s connection to the local infrastructure such as roads, schools, and utilities. These fees are often called “Mello Roos” fees and are handled through the escrow account at least until the surrounding infrastructure is completed, and often extends beyond that to allow new home owners to pay these (sometimes very substantial) fees over a longer period of time.
For Sale by Owner (FSBO) Escrow
This is the type of escrow used when either the buyer or seller does not have a real estate agent representing them in an attempt to save commission costs. In this type of escrow, the buyer and/or seller are not obligated to use a real estate agent or the agent’s preferred escrow company. While this option may cost less in the short term, it can cause a lot of problems down the line if either side doesn’t know what they are doing. In this type of escrow a title company or a lawyer typically acts as the escrow agent.
Residential Short Sale Escrow
This type of escrow is used when a seller is attempting to sell a home for less than the home is worth, typically when the home value suddenly drops by 20% or more, or the home is no longer worth the cost of the mortgage. This type of sale is often a preemptive measure on the part of the seller to avoid foreclosure by the bank. These types of escrows and typically longer and require much more paperwork than a typical escrow. A short sale escrow requires lender approval since they stand to lose a fair bit of money, but also looks better on the sellers credit report than a foreclosure since they took action to avoid a repossession. Under the right circumstances the seller may even be immediately eligible to purchase another home.
Foreclosure Property (REO) Escrow
This type of escrow is used when a seller has defaulted on their loan and the bank has repossessed the house. This is different than a standard escrow in that the buyer is in escrow with the bank that owns the home and as a result must follow a much more strict set of rules, regulations, and time lines. This is not a typical sale and it is often best to work with an agent that specializes in this kind of escrow.
Residential Refinance Escrow
This type of escrow is used when a home owner of a home wants to take out some of their home’s equity in cast to pay for things like repairs, upgrades, or possibly even pay off debts or change the terms of their loans. The biggest factor here is the escrow account itself. If the homeowner stays with the same lender, their account remains the same. If they go with a new lender, their old escrow account will be closed out and a new one will be created with the new lender.
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