Escrow Basics: What Buyers and Sellers Need to Know

The escrow process can be confusing for buyers and sellers, but it doesn't have to be. Here's a quick overview of what happens once escrow is opened.

There are three major milestones that need to be tackled in order to close escrow successfully: the home inspection contingency, the appraisal contingency, and the loan contingency. The length of escrow agreed upon in the accepted offer will dictate how long we have to clear each contingency.

The Home Inspection Contingency

The home inspection contingency is one of the most important steps in the home-buying process. By hiring a qualified inspector to assess the property's condition, buyers can identify any major issues that need to be addressed. During this portion, both buyers and sellers are reviewing disclosures, and property reports, verifying the accuracy of data, and where there's an HOA, they are reviewing HOA documents, also known as CC&Rs.

If any repairs or compensation are needed, buyers can negotiate with the seller to have them completed before moving forward with the sale. Once the inspection is complete, and both parties are satisfied, this contingency is cleared, and the sale can proceed.

The Appraisal Contingency

Next is the appraisal contingency. The lender will order an appraisal of the property to make sure it is worth at least the purchase price. If the appraised value comes in lower than expected, the buyer may need to come up with additional cash to make up the difference or renegotiate with the seller.

The Loan Contingency

A loan contingency is a common provision in real estate purchase contracts that says the buyer's obligation to complete the purchase is contingent on the buyer obtaining financing. In other words, if the buyer can't get a loan to buy the property, the buyer can back out of the contract and get their earnest money deposit back. 

Overall, the loan contingency is an important protection for buyers that helps to ensure that they will be able to obtain financing for their purchase. This protects both buyers and sellers by making sure that everyone is able to fulfill their obligations under the contract.