Buyer’s look forward to closing escrow (COE), because they have been told that after escrow closes they will receive the keys to their new home. Signing documents regarding the purchase of a home can be a little overwhelming for some and for others a white and black blur. For many clients simply signing their legal name after years and years of signing their “preferred” name is enough of a challenge, let alone reading and understanding all that they sign. With that in mind, I wanted to take a moment to explain some of the documents involved in the purchase of real estate.
The Escrow Officer’s Role.
Simply put, this is a third party that insures that the contractual obligations of the buyer and seller are documented as satisfied. They provide a neutral environment to sign documents and insure that the monies are dispersed according to the contractual directions. Many times, escrow agents are employees of a title company. In Santa Clara County, commonly the seller or listing agent chooses the escrow and/or title company that will be used for the transaction. However, it is actually the right of the buyer to designate. If you have a preference, please make sure you discuss it with your agent at the time you create the purchase contract.
The difference between a mortgage and a deed of trust.
In California, the deed of trust is utilized as a security device for real property. It is held by a third party (many times a title company- called the trustee) and has two simple functions. The first responsibility of the trustee in regards to the deed of trust is the reconveyance of the deed (ownership) from the trustee to the borrower once the note is paid off. The second job of the trustee is in regards to the foreclosure process if the borrower fails to pay. In essence, the trustee insures the contractual agreements between the beneficiary (lender) and the trustor (the borrower) are satisfied.
The mortgage as the security device.
There is no third party in the set up. There is the lender and there is the borrower. In this situation the borrower is dependent on the lender to transfer title to the borrower once payment is received in full. The lender is dependent on the borrower paying off the debts as prescribed in the note or has the right to begin foreclosure proceedings. So even though we might refer to paying our “mortgage” each month, the more accurate description in California would be loan payment.
With a deed of trust, either the trustee or a hired agency by the trustee, will handle the foreclosure process.
It is the trustee that records the Notice of Default with the county where the property is located. If the borrower does not correct the default through payment, loan modification, or sale, the trustee moves toward foreclosure. This is why the public sale of a foreclosed home is called a trustee sale. This is the attempt of the trustee to retrieve the debt owed the lender. If the property does not sell, the property title (collateral for the loan) is turned over to the lender (beneficiary) and becomes part of the lender’s asset portfolio known as REO or Real Estate Owned. Then the lender will most likely list the home for sale to recover any debt that is possible.
The actual note itself.
This is your promise to pay the lender. This document details the terms of the note. It will indicate the annual percentage rate charged. It will indicate the number of years (period) payments are to be made and will include any changes in the loan interest rate if an adjustable rate mortgage (ARM) is involved. Most likely, an amortization table will be included in this document that outlines for each payment what amount will be applied to the principal (a portion of the actual amount borrowed) and how much will be applied to interest (based on the interest rate applied for that period). It will also indicate how much the borrower will have paid in total at the end of the note. The most scariest number of all!
The CC&Rs (Covenants, Conditions, and Restrictions).
These are the binding “rules” established for the property and it is very important that the home buyer understand these items completely. Do not scan these documents. Read them. Your agent should provide a copy prior to release of contingencies and it is important to take the time necessary to understand the details. Breaking the “rules” can result in fines and/or even reversion of the property back to original owner. Amazing, but true.
The preliminary title report.
Offered by the escrow agent prior to closing. Ask any questions about outstanding liens on the property. Title insurance is purchased by the seller in order to provide good title to the new owner. Title insurance is also purchased by the buyer for the lender to confirm clear title. Here is a great resource on title insurance policies.
Determining how the buyer hold title.
The professionals best to advise a client on how to hold title is an attorney or a tax professional. The escrow officer or the real estate agent will not be able to assist in this decision. There are tax and legal implications to how title is held and therefore this decision must be thought out carefully in consideration of the buyer’s estate. Here is an online resource to explain the different ways in which one can hold title to property in California.
This an overview of the process and depending on the type of property being purchased or the loan you will be utilizing to purchase the home, there can be additional documents that need your review and signature. Make sure that you are comfortable with every document that is presented. It is our job as professionals, to answer any questions you might have. Being informed appropriately for any document requiring signature is the best policy for this most important purchase. Ask your agent about any of these documents ahead of closing to be best prepared.