Escrow, Title, Broker... What Do All These People Do Anyway?
When I first started working at Better Home Financial a year ago, I was a little starstruck as to how many companies and people are involved in one single mortgage loan and real estate transaction. As a 25 year old that's never purchased a home myself, one of the first questions I had for our office manager Tracy was, "what do all these people do exactly?"
If you're anything like I was, then you may be wondering the same thing. Let's break down exactly what these companies do, and why they are all necessary in getting your mortgage from pre-approved to funded.
Mortgage Broker: This is us! As a mortgage broker in San Dimas, we help connect wholesale lenders with potential borrowers in our community. Wholesale lenders don't have the infrastructure or time to service customers themselves, so they outsource their lending ability to brokers. In doing this, they are able to offer extremely low rates since their overhead is so much lower.
It's our job to understand our client's needs, get rate quotes, perform loan analysis, gather all necessary loan documentation and information, then send it to the lender for approval. In the end, we take pride in the fact that we are the entity buyers/sellers trust most, as we receive the most personal financial information about our clients.
Mortgage Lender: The lender is the entity that actually has the money to lend to a borrower. In the end, it's the lender that determines the loan amount, interest rate, and other terms they are willing to give to our clients.
Not all lenders offer the same rates for the same situations though, and that's where our 30-years of business experience comes into play. We know how to hand pick reputable lenders in order to close loans quickly, and at the lowest rate possible for our client's financial situation.
Escrow Company: The escrow company acts as a neutral third party to collect funds and documents from lenders, buyers, borrowers, and sellers involved in the transaction. When a seller accepts a purchase agreement from a buyer, then an escrow account is opened in order to facilitate the process going forward.
Once all the conditions of transaction are settled, your lender will wire funds to escrow so the seller can be paid, an escrow officer will record your name on the deed and title transfer, and you'll receive the keys to your new home!
After this there is then a second escrow account that gets opened between you and your lender. This is often where people get confused about escrow, because it takes on a different role at this stage.
Since the lender has a vested interest in making sure you pay for home owner's insurance, title insurance, and property taxes, you will be required to pay a portion of the estimated annual amount of those costs plus the principal and interest into that escrow account.
At the end of the year the lender adjusts the amount based on the actual tax and insurance bills, then will reimburse you from that account if you paid too much.
Title Company: The basic function of the title company is to make sure that the seller of a property has legitimate claim to it. Could you imagine if someone faked a title to a home and attempted to sell it? That'd be a ton of money lost by the lender, to say the least.
To protect against this possibility, title companies do what's called a title search: a very intense examination of property records ensure that the owner has full legal claim to the real estate, and that no one else can come and claim full or partial ownership of the home at any time.
Once the title is found to be valid by title search, the title company issues title insurance which protects the lender and the owner against the possibility the title company made a mistake and someone else does in fact have claim to the property. It covers legal fees, the value of the home, and the amount the lender lent you to buy the home.
Real Estate Agents: These are individuals that connect buyers and sellers of real estate. The real estate market is one wrought with asymmetric information, meaning the market is imperfect and difficult to navigate for most people not "in-the-know" about the local market.
Compare that to the stock market for example. Everyone has access to the same information at the same time, there's plenty of buyers and sellers every second of the day, and there's theoretically no informational advantage for an individual investor.
Well, this is not the case for real estate markets. Buyers and sellers can be more difficult to find, and knowing how to negotiate selling or buying a property at the right price often requires professional knowledge and experience. Not to mention, that all takes tons of time and effort.
As a result, real estate agents have become apart of the vast majority of real estate transactions in the country as the primary negotiators and property searchers for their clients. They also facilitate some communication with brokers, title, and escrow on their client's behalf, and are known to give their clients the keys to their new home in the end.