1. What is Escrow?
Escrow companies ensure that no fund or title to property will change hands until all of the instructions to the transaction (escrow instructions) have been followed. The escrow officer is basically the person who brings together and coordinates all of the aspects of a Real Estate transaction. This gets more complicated each year, ie: State and local tax issues, title, lender, realtors, home warranty, termite, etc… and then, when everyone else has completed their job, the escrow officer closes the escrow (and pays everyone!!)
2. Why use an Escrow?
An Escrow is generally required in California by lenders, buyer and sellers. In California, an escrow company can be licensed/regulated by 1) California Department of Financial Protection & Innovation (independent); 2) The Department of Real Estate (broker owned); 3) the Insurance Commissioner (title company). There are different levels of professional standard requirements for each governing body. An escrow holder as is an independent third party to a transaction, charged with holding funds, deeds and other documents, for delivery from one party to another, when all agreed upon conditions and/or terms have been met.
3. Who selects the Escrow Company?
The selection of the escrow company is normally done by agreement between the principles to the transaction. Typically, the real estate agents recommend an escrow company. Typically, the real estate agents recommend an escrow company. Keep in mind in this regard, that the performance of any affiliate service company that you recommend will reflect on you and your potential future business relationship with your client. As real estate professional you must carefully select an escrow professional who is actively supporting the industry with time, effort and membership in your association. Choosing from this group will assure you the highest level of professionalism, ethics and accountability. In addition, by recommending an “Independent” escrow company, you can be assured that you are truly getting a “neutral” third party.
4. What Consumer Protections are required of Escrow Companies?
As a real estate buyer, seller or agent, you have a choice of the company that provides your escrow service. There are three main types of providers, and only one provides serious safeguards against theft or embezzlement.
Company is required to carry a $5 million Fidelity Bond to protect trust account against theft or embezzlement:
Company’s sole business is doing escrows:
Company is required to have an onsite manager with at least five years experience as an Escrow Officer:
Company is required to have two independent financial audits per year to ensure compliance with California regulations:
Company requires that all employees have fingerprints and background checks on file with Department of Justice:
5. What is Annual Percentage Rate (as listed on lender’s Truth-In-Lending disclosure)?
This is not the Note rate for which the borrower applied. The Annual Percentage Rate (APR) is the cost of the loan in percentage then taking into account various loan charges and closing costs of which interest is only one such charge. Other charges used in calculation of the APR are Private Mortgage Insurance3 (PMI) or FHA Mortgage Insurance Premium (when applicable) and Prepaid Finance Charges (loan discount, origination fees, prepaid interest and other credit costs). The APR is calculated by spreading these charges over the life of the loan, which results in a rate higher than the interest rate shown on your Mortgage/Deed of Trust Note. If interest were the only Finance Charge, then the interest rate and the APR would be the same.
6. What are Prepaid Finance Charges (as listed on lender’s Truth-In-Lending disclosure)?
Prepaid Finance Charges are certain charges made in connection with the loan and which must be paid upon the close of the loan. These charges are defined by the Federal Reserve Board in Regulation Z and the charges must be paid by the borrower. Non-Inclusive examples of such charges are: Loan origination fees, “Points” or Discount fees, Private Mortgage Insurance or FHA Mortgage Insurance, Tax Service fee. Some loan charges are specifically excluded from the Prepaid Finance Charges such as appraisal fees and credit report fees.
Prepaid Finance Charges are totaled and then subtracted from the Loan Amount (the face amount of the Deed of Trust/Mortgage Note). The net figure is the Amount Financed.
7. What are Finance Charges (as listed on lender’s Truth-In-Lending disclosure)?
The amount of interest, prepaid finance charge and certain insurance premiums (if any) which the borrower will be expected to pay over the life of the loan.
8. What are Amount Financed (as listed on lender’s Truth-In-Lending disclosure)?
The Amount Financed is the loan amount applied for less the prepaid finance charges. Prepaid finance charges can be found on the Good Faith Estimate/Settlement Statement (HUD-1 or 1A). For example if the borrower’s note is for $100.000.00 and the Prepaid Finance Charges total $5,000.00, the Amount Financed would be $95,000.00. The Amount Financed is the figure on which the Annual Percentage Rate is based.
9. What is Total of Payments (as listed on lender’s Truth-In-Lending disclosure)?
This figure represents the total of all payments made toward principal, interest and mortgage insurance (if applicable) over the life of the loan.
10. What is Payment Schedule (as listed on lender’s Truth-In-Lending disclosure)?
The dollar figures in the Payment Schedule represents principal, interest, plus Private Mortgage Insurance (if applicable) over the life of the loan. These figures will not reflect taxes and insurance impounds or any temporary buy-down payments contributed by the seller.
11. What is RESPA?
The Real Estate Settlement Procedures Act of 1974, a federal statute designed to protect consumers. RESPA requires disclosure of certain costs in the sale of a residential (one-to-four family) improved property financed by a federally insured lender.
12. What is the Loan Origination Fee?
A fee charged by the mortgage Broker or Lender, usually expressed as a percentage of the loan amount.
13. What is the Loan Discount fee?
Commonly referred to as Discount Points. A one time fee charged by the lender to adjust the yield on the loan to what the marked conditions demand.
14. What is the Tax Service fee?
A fee paid to a tax service agency that, for the life of the loan, each year reviews the records of the taxing agencies. If the borrower fails to pay property taxes, the agency reports this to the lender.
15. What is a Processing fee?
Fee charged by mortgage Broker or Lender for the processing and packaging of all documents required to obtain approval of the loan.
16. What is a Document Preparation fee?
Fee charged by the lender for preparation of the final legal documents for the loan, such as the Note and Deed of Trust, etc.
17. What are Recording fees?
Fees paid the County Recorder for recording the Grant Deed and Deed of Trust, etc. as required to transfer title and/or secure the loan.
18. What is Title Insurance fee?
Premium charged by the Title Insurer to issue the policy(ies) requested. In a purchase, an “Owners” Policy is customary to insure the buyer has clear title. If a loan is involved a “Lender’s” policy is usually required by the new lender to insure the lien holder’s interest.
19. What is the Escrow fee?
Fee charged by the escrow holder to act as the neutral third party to hold documents and funds and deliver them in compliance with the written agreement of the principals. Also covers the preparation of escrow instructions and documents and supervision and co-ordination of the transaction.
20. What is the Mortgage Insurance Premium?
Pays for insurance to cover the lender from loss due to payment default by the buyer.
21. What is a Hazard Insurance Premium?
Pays for fire and/or homeowners insurance coverage to protect the property owner and the lender against covered losses.
22. What is Property Tax Proration?
Proration between the seller and buyer of the current property tax billing, to allocate to each their cost for the time property is owned.
23. What are Tax and/or Insurance Impounds (Escrows)?
Funds held by the borrower’s lender to pay property taxes, insurance, etc. as they become due. An advance payment is required to establish the account, based upon anticipated amounts needed to make payments when next due. Thereafter, 1/12th of the annual amounts due are collected with the monthly mortgage payment.
24. What is Prepaid Interest?
Covers interest on the new loan from date of funding to 30 days prior to the first mortgage payment, IN LIEU OF an odd or adjusted first month payment. Monthly payments include interest for the 30 days prior to the payment due date.
25. What is a Credit Report fee?
Fee to obtain a credit history to help lender determine a borrower’s credit-worthiness.
26. What is an Appraisal fee?
Fee to obtain a written report by a qualified appraiser, of the market value of the property.
27. What are Non-Recurring closing costs?
One time fees to purchase a property or obtain a new loan.
28. What are Recurring closing costs?
Ongoing costs of owning a property, including interest payments on the loan for the property.
29. What is a Quit Claim Deed?
A quitclaim deed always has language in it that says the grantor “quitclaims” the property to the grantee. A quitclaim deed never says that the grantor “grants” the property to the grantee.
The function of a quitclaim deed is to convey to the grantee whatever interest, if any, the grantor has in the real property. If the grantor owns a 100% interest, then a quitclaim deed will operate to transfer that entire interest. Similarly, if the grantor has only 50% interest in the property, then the quitclaim deed operates to transfer only that one-half interest.
Most important, if the grantor does not have any interest in the property (i.e., he or she does not own it), the use of a quitclaim deed does not transfer any interest in the property since the grantor has nothing to convey.
Quitclaim deeds are generally used when there is uncertainty, usually in the title company’s mind as to whether or not the grantor has an interest in the property. For example, a quitclaim deed is often used when one spouse owns the property as his or her separate property and the owner’s spouse has no record title interest thereto. For example, even though the husband may own the real estate as his “sole and separate property” most grantees, as well as title insurance companies, want to be certain that the wife does not contend that she has a community property interest in the property. To eliminate a later claim from the wife that she owned an interest in the property, the wife (being the spouse who is not on record title) will sign a quitclaim deed in favor of the grantee. This means the wife is conveying any of the interest she has in the property, which may be none. The husband will separately execute a grant deed.
A quitclaim deed does not warrant that the person delivering the deed has any title to the property. The quitclaim deed only transfers the title actually owned, but if nothing is owned then the deed is ineffective.
30. What is a Grant Deed?
Grant deeds warrant that the grantor has the specific interest in the property that he or she is conveying to the grantee. In other words, the grant deed only is used when the grantor actually has an interest in the property. Grant deeds are the most commonly used type of deed in California, and are almost always used when the grantor owns the property. The term “grant” is always contained in a grant deed.
A grant deed contains two implied warranties even though they are not specifically stated in the document: (1) Previous to the time that the deed is delivered, the grantor did not convey away the same interest in the property to another person. (2) The property that is being conveyed to the grantee is free and clear of all liens and encumbrances placed on the property by the grantor. An exception to either of these two implied warranties must be expressly stated in the deed.
31. What is Community Property?
Title is usually held as “community property,” “joint tenants,” or “tenants in common.” Title is only taken as community property if the parties are married. This is a special type of ownership—both spouses own the property in equal percentages, and it is the property of the marriage. If the couple divorces, each spouse is entitled to receive one-half of the value of the property. Each spouse may will his or her half to anyone else, such as children, charities or friends. In absence of a will, the entire community property interest of the decedent passes to the surviving spouse.
32. What is Joint Tenancy?
This means that the parties own the property together, and at death the entire interest of the decedent automatically passes to the surviving joint tenant. If the decedent leaves a will conveying his interest to someone else, the will is ineffective. Joint tenancy property automatically passes to the survivor regardless of what the will says.
33. What is Tenants in Common?
This type of vesting means that both parties own the property together and at death the property of the decedent is transferred according to his or her will. If there is no will, then the property transfers to his or her relative. If he or she has no relatives and failed to leave a will, the interest of the decedent will escheat (i.e. transfer) to the State of California. The interest will never transfer to the surviving tenants in common unless that survivor happens to be named in the will or is an appropriate relative.