Definition: When an item of value is transferred to a third party, the escrow agent, for delivery to the grantee only upon the fulfillment of pre-specified conditions.
Example: Tori bought Dean’s house for $100,000. Tori had to give the escrow agent the purchase money and both Tori and Dean had to give the agent their deed. The escrow agent held their information for 30 days until they could clear their contingencies. After 30 days and the contingencies were cleared, Tori was able to move into her new home.
a) Neutral third party- Tori and Dean’s escrow agent held the escrow for 30 days.
b) Collecting of documents- Tori and Dean had to give the escrow agent the purchase money and their deed.
c) Fulfillment of pre-specified conditions- Tori had to lift all her contingencies before they could close escrow and she could move into her new home.
2) Escrow Instructions-
Definition: Written instructions to the escrow agent that gives them permission to deliver deposited funds and documents.
Example: Sam agrees to sell his house to Bob for $200,000. Both Sam and Bob agreed verbally to the agreement but never signed a purchase agreement or put anything in writing. But, both Sam and Bob signed written escrow instructions. This makes Sam and Bob’s agreement official because it fulfills the written memorandum of the parties’ agreement. After the documents are delivered Bob can move into Sam’s home.
a) Written instructions- The escrow written instructions fulfill the written memorandum of the parties’ agreement that was otherwise not fulfilled with a purchase agreement.
b) Permission- The escrow instructions that both parties signed gives escrow agent permission to deliver and deposit Bob’s funds.
c) Completion of escrow- Once the documents are delivered escrow is closed and the transaction is complete.
Definition: When the escrow agent gives the funds to the court for them to decide which party has the rights to it.
Example: Simon was acting as both the real estates broke and escrow agent in a transaction. The parties were having a disagreement and buyer told Simon the escrow was cancelled. Simon gave the earnest money back to the buyer without telling the seller. The seller found out and became very upset claiming he did not agree to the cancellation or the release of funds. The escrow agent had to return the funds to the court for them to decide who was entitled to the money.
a) Escrow agent holding money- Simon is the escrow agent holding money for both the seller and buyer.
b) Disagreement during escrow- The seller and the buyer in escrow were having disagreements about the terms.
c) Escrow agent gives funds to the court- Simon had to give the money to the court because both claimed they had rights to it.
4) The Real Estate Settlement Procedures Act (RESPA)
Definition: A law that says lenders have to disclose closing cost information to loan applicants.
Example: Robert is a first time homebuyer buying a house with an FHA loan. He knows he has to come up with a down payment of 3.5% and saved $7,000 for a down payment on $200,000 house. When Robert enters escrow the financial lender, who is legally obligated, tells Robert he will need an extra $6,000 to close escrow. Robert has to pull money out of his stocks to cover the closing costs before escrow closes. If the lender did not tell him, Robert would have not been able to pull out the funds he needed to close escrow.
a) A buyer in need of a loan- Robert is getting an FHA loan to buy a $200,000 house.
b) Residential property- Robert is a first time homebuyer buying a house for him to live in.
c) Disclosure of closing costs- The financial lender tells Robert he needs an additional $6,000 on top of his down payment to close escrow.
5) Settlement Statement-
Definition: A document that states all of the final agreements of the real estates transaction including credits and debits and what each party will be required to close escrow.
Example: Sarah is buying Tom’s house for $500,000 using a conventional loan. Before the close of escrow, the escrow agent presents both Sarah and Tom the things they will need to do before the close of escrow. The written statement provided by the escrow agent says Sarah must pay 20% for her down payment and provide an additional $5,000 for closing costs. It also says Tom must pay 6% of the purchase price to the real estate agents for their commission.
a) Real estate transaction that requires escrow- Sarah is buying a house using a conventional loan.
b) States all the final agreements- The statement states all the things Sarah and Tom must do before the close of escrow.
c) States the credits and debits- The statement states that Sarah must pay 20% of the down payment and provide an additional $5,000 for closing costs. Tom must pay 6% of the purchase price for the real agent’s commission.
Definition: An amount that is owed and still needs to be paid to an outside party.
Example: Tony sold his house to Ross for $400,000. Tony agrees to pay Ross $400,000 therefore he is in debt to Tony for that amount until he pays it.
a) A transaction involving monetary items- Tony sold his house to Ross.
b) An amount owed- Ross owes Tony $400,000 for sale of his house.
c) An amount that must be paid- Ross cannot live in Tony’s house until he pays
his debt to Tony for the house.
Definition: An amount that is to be received by an outside party.
Example: Richard bought Arnold’s house for $300,000. Richard will not give Arnold the right’s to his house until Richard pays Arnold the $300,000 he agreed to pay.
a) A transaction involving monetary items- Richard bought Arnold’s house.
b) An amount to be received- Arnold is to receive $300,000 from Richard from the sale of his house.
c) An amount that must be received to complete transaction- Richard must pay Arnold to receive the house.
8) Loan Origination Fee-
Definition: The fee charged by the lender to cover administrative fees and the cost to make a loan.
Example: Tamera bought a house for $400,000 but only had a down payment of 20% and needed a loan to cover the rest of the cost. The lender Tamera used sent her a statement with the amount she will need to pay for the amount to make the loan, which was 2% of her purchase price. The lender used this money to create the loan and pay for administrative costs.
a) A need for a loan- Tamera bought a house for $400,000 and only had 20% to put down on the house.
b) Fee charged by the lender- Tamera is required to pay 2% of the purchase price of her house.
c) Money for the creation of the loan and to pay for the administrative costs- Tamera’s lender used the money to create the loan and pay for administrative costs.
9) Prepaid Interest-
Definition: The amount of money in interest due on the first month of a loan term.
Example: Steve bought a new home and took out a loan for $300,000. Usually, interest is paid at the end of each month. But, during the first month of Steve’s loan he is required to pay the interest up front.
a) Need for a loan- Steve needs to take out a loan to pay for his $300,000 house.
b) Interest on a loan- Steve must take out a loan and he has to pay interest on the loan.
c) Interest paid up front- Steve must pay his first month interest up front.
Definition: In real estate, it is the process of splitting up the expenses on a property as of a specific date to determine how much the seller owes and how much the buyer owes.
Example: Ted bought Lilly’s house for $450,000 on December 30th. The taxes for Lilly’s house were due on December 20th but she did not pay it because she could not afford it. At the close of escrow it was determined that Lilly only had to pay 75% of the taxes, and Ted was responsible for paying 25% of the remaining taxes.
a) Transfer of a property- Ted bought Lilly’s house.
b) Expenses owed on the property- Lilly did not pay the taxes on her house and they are still owed.
c) Splitting up the expenses- Lilly must pay 75% of the taxes and Ted was to pay 25% of the taxes.