Escrow Process and Closing Statements

Escrow Responsibilities

Escrow is a third-party entity (someone not a party to the purchase contract) that holds documents and/or funds until the parties have fully executed the contract and it's time to close.

Escrow is generally responsible for managing all earnest money deposits according to Hawaii regulations.

Hawaii Escrow Act of 1967

-Only a specially licensed and bonded corporation may hold escrow funds.

-Escrow records must be audited annually.

-All funds must be deposited into a trust account.

-Escrow funds may not be used for any purpose for which they weren't originally intended.

-Funds may not be used to offer rebates or referral fees.

In Hawaii, an escrow agent from a title insurance company handles most closings.

However, Hawaii laws permit most lenders, insurance companies, and trust companies to perform escrow services, as well as attorneys licensed in Hawaii and active real estate brokers who are representing either the buyer or the seller.

escrow can only be opened when the escrow agent receives a copy of the valid purchase contract along with an earnest money deposit.

purchase contract is submitted to escrow, likely along with escrow instructions. Escrow instructions are a separate agreement between escrow, buyers, and sellers in which the parties agree on duties that escrow will perform, including handling of earnest money, and how each party will cooperate with escrow in order to assure such performance.

Escrow serves as a fiduciary for both the buyer and the seller,

can only obey the instructions presented by both parties in either the contract, the escrow instructions, or other agreed-upon written documents.

During the escrow period, the title insurance company will perform the title search by reviewing records found at the Bureau of Conveyances and/or the Land Court and will issue a title insurance commitment.

This commitment is a promise to provide a title insurance policy if certain conditions are met. The commitment notes any items the policy will and won't cover.

Leading up to closing, the seller's and buyer's agents must ensure that deadlines are met, contingencies are cleared, paperwork is fully executed and delivered, and that the buyer conducts a final property walk through.

-Buyers will continue to work toward final loan approval and should review the title condition as presented in the title insurance commitment, obtain necessary insurance, and order desired property inspections.

-Sellers must make any agreed-upon repairs and give escrow permission to order a loan payoff statement.

-Escrow will either prepare or obtain all documentation for the appropriate signatures at closing.

-Immediately prior to closing, the lender and escrow will work together to be sure all the loan figures appear properly in the closing statements.

Closing Responsibilities

-closing or escrow agent meets with buyer and seller and walks each party through the documents to be signed.

-seller signs the conveyance before the actual closing date and before the buyers.

-Buyers sign both closing and mortgage loan documents

-escrow can close only when all buyer and lender funds have cleared and have been deposited

-escrow companies now require that buyer and lender funds arrive at least two days prior to the date of recording, and most escrow companies now require wired funds.

-Conveyance occurs on formal closing date, which is the date upon which buyer and seller have signed all documents, all funds have cleared, and all documents have been recorded.

-The exact time and date of recording is time stamped on the documents.

-After recording, buyer's, seller's agents and escrow receive confirmation that recordation is complete. -Escrow then disburses funds as required under the purchase agreement and provides the buyer with recorded copies of the documents.

Closing Statements

escrow agent will prepare a closing statement for both the buyer and the seller. This statement outlines all funds being paid to or paid by each party. The parties see only their own closing figures, not the other party's figures.

The two-column closing statement (aka settlement statement) will include

-debits and credits to the parties. A charge to a

party or an amount that the party will owe at closing will appear as a debit on that party's closing statement (left-hand column). An amount that the party has already paid or that is in the party's favor will appear as a credit (right-hand

column) on the closing statement.

debits

A charge to a party or an amount that the party will owe at closing will appear as a debit on that party's closing statement (left-hand column).

credits

An amount that the party has already paid or that is in the party's favor will appear as a credit (right-hand column) on the closing statement.

To solve a prorations problem, you'll need to determine the following information:

-calendar - Hawaii closings routinely use a 30-day (360-day year) calendar basis. Escrow will divide an annual charge by 360 to determine the daily proration amount or by 30 to determine the monthly proration amount.

-Is the expense paid in arrears (accrued expense) or in advance (prepaid expense)?

-Who has paid or who will pay the expense (buyer or seller)?

-Who has earned or received the income?

-When did or when will payment occur?

-Are you prorating to closing day or through closing day? (In Hawaii, the seller typically owns the day of closing, which means that unless told otherwise, calculate seller's expenses through the day of closing.)

Example- The buyer and seller are closing on February 1.

-Taxes for the previous July through December are not yet due.

-Taxes for the period from January 1 to February 1 are not yet due.

-Total tax bill owed by the seller is $1,397 for July 1 to February 1.

-The seller's closing statement will include a debit of $1,397, and the buyer's closing statement will include a credit

for that same amount. This results in the seller reimbursing the buyer for the buyer's portion of the taxes that will

be due on August 20.

Example - The seller prepaid $565 for a security system. The buyer will take over the system. Expenses are prorated through August 2, the day of closing.

proration will be calculated on a 360-day basis (the buyer owes the seller for the period between August 2 and

December 31).

-$565 ÷ 360 = $1.5694444, or $1.569 per day

-28 days in August plus 30 days each in September through December = 148 days

-148 × $1.569 = $232.212, or $232.21 (debit to the buyer).

-Settlement statement will show a credit to the seller and debit to the buyer of $232.21 to refund the seller

for the portion of time that's been paid but during which the buyer will live in the property

Example- Annual security system payment of $540 is due on March 1. Closing is on February 15.

Prorate through the day of closing (the seller owes the buyer for the time period January 1 through February 14):

-$540 ÷ 360 = $1.50 per day

-1 month + 15 days in February = 45 days × $1.50 = $67.50 (seller owes; buyer will pay the remainder)

-The settlement statement will show a debit to the seller and a credit to the buyer of $67.50 to pay the buyer

for the seller's portion of the cost

Example- Seller has prepaid for a tank of propane gas

The amount left in the tank will be measured and the buyer will be responsible for reimbursing the seller for the propane remaining in the tank. This proration will appear as a credit to the seller and a debit to the buyer.

Some amounts that appear on the closing statement will be a debit or a credit to just one party.

For example, the buyer is responsible for loan fees, and those will appear as a debit to the buyer.

Buyers are typically responsible for the following costs, though this is always negotiablebetween the parties. (Some fees may be paid outside closing and thus won't appear on the closing statement.):

-Appraisal and credit report fees (typically paid outside closing)

-Inspection fees (typically paid outside closing)

-Lender's title insurance

-Loan fees and points

-Fees for recording the new deed and the buyer's new mortgage

-Half the escrow and closing fee

Sellers are typically responsible for the following costs, though this is always negotiable between the parties:

-Broker commission

-Documentary and recording costs

-Satisfaction of existing liens

-Foreign Investment in Real Property Tax Act (FIRPTA) and Hawaii Real Property Tax Act

(HARPTA) withholding (Sellers are charged for the calculated amount, but buyers are responsible for collecting

and remitting it, usually through the closing company.)

-Owner's title insurance

-Surveys and termite inspection (likely paid for outside closing)

-Half of the escrow and closing fee

-Conveyance tax

-Any unpaid property taxes or assessment due up to the day of closing