Texas Home Buying and Escrow Process
- Texas' escrow process is similar to other states where an escrow agent, closing agent, or representative from a title company is used to complete the transaction.
- The buyer's funds are held by a neutral third party, as is the purchase contract, until an escrow agent verifies that both parties have performed their roles in the transaction
- The escrow company then disburses all funds and the keys to the property to the appropriate parties.
- Texas has its own environmental features that influence which inspections get performed, such as termite inspection.
Step by Step
Part 1: Disclosures, inspections, and credits
These are the initial tasks once a buyer is in contract, and are most often done in parallel to Part 2: The mortgage process:
- An offer is accepted by the seller and a contract is signed. The escrow processbegins.
- A deposit, called earnest money, is deposited with the seller's real estate brokerage, an escrow agent, or an attorney depending on the contract (never to the seller directly). Escrow companies are often part of a title company, but work as separate divisions.
- In addition, a small amount of money (in the hundreds of dollars) is generally exchanged for an option period (often 10 days or so) wherein the buyer can back out of the contract for any reason and still recover any earnest money deposit.
- The buyer reviews and signs off on any disclosures. These disclosures vary based on property type, but often include things like known flaws with the property, prior improvements or repairs, and potential environmental hazards. A form called a seller's disclosure of property condition (see a sample form via the Texas Property Code here) is provided by the seller on or before the day the contract is signed. Sellers may see this as beneficial to themselves, and believe that buyers will build these pre-disclosed facts into the contract price (and thus sellers may be reluctant to provide any credits for these defects).
- The buyer elects to perform inspections on the property as agreed upon in the contract. Unlike other states, there is generally no inspection contingency in a contract that is separate from the option period that allows the buyer to walk away for any reason. For this reason, the option period is functionally used to give buyers time to inspect the property before their right to walk away without penalty expires. The types of inspections vary by property type and situation (and locale), but in Texas, common inspections include an initial inspection by a licensed home inspector and additionally a termite inspection.
- Based on the outcome of inspections, buyers may elect to ask the seller for repair work, closing cost credits, or a reduction in the sale price due to flaws that were uncovered. Sellers have three options: agree to all of the buyers's requests, offer a modified solution back to the buyer, or decline to make any amends. In response, the buyer can continue to negotiate, accept the seller's position, or end the transaction before the option period expires and recoup their earnest money.
- The buyer may also negotiate for a residential service contract (called a home warranty in other parts of the country) that covers major appliances from failure for a time period after the sale, typically a year.
Part 2: The mortgage process
For those borrowing to purchase their home, the mortgage process is usually the the most stressful and opaque part of the transaction. It's best to start as early as possible and be ready to produce lots of documentation. The following is the general process in Texas:
- A buyer submits a loan application to their lender, either directly or through a mortgage broker. See a sample Uniform Residential Loan Application used in Texas. Of course, well before this point, a pre-qualification or pre-approval with a lender should have been acquired.
- Within 3 days, the lender sends a "Good Faith Estimate," or GFE, to the buyer that is a breakdown of estimated closing costs. The final costs are likely to deviate from this estimate. See a sample GFE at hud.gov.
- The buyer sends a series of personal financial disclosures to the lender. These vary by situation, but the most commonly requested documents are:
- Several months of statements for each bank account a borrower holds (including any investment accounts)
- Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
- Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.
- Recent pay stubs and contact information for each borrower's employer. The number of pay stubs varies by situation.
- Any other disclosures that are material to a borrower's financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there's something that affects how much money you have on hand that isn't shown by simply looking at your salary, be prepared to document it.
- Explanation of any credit inquiries
- Substantiation of any large deposits or cash gifts that aren't regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it's good practice to ask your lender if you suspect you might have a material cash gift or large deposit - so you aren't surprised by this at the last minute.
- Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower's personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligability for the loan for which you've applied.
- The lender renders an approval decision, and if approved, issues a loan commitment letter, stating its willingness to fund the mortgage provided certain conditions are met. These conditions usually include appraisal (so the lender can confirm that the property you're buying isn't worth far less than you're paying) but will also generally include any material change in your situation -or the property- as initially disclosed to your lender.
- The financing contingency, orloan contingency is removed by the buyer by the loan contingency date as defined in the financing addendum to the contract.
- An appraisal is ordered by the lender or mortgage broker via a central directory of appraisers (often called an Appraisal Management Company or AMC). Choosing a specific appraiser is not possible, but a mortgage broker can reject an appraiser and ask for a new one. If the appraisal comes in lower than the purchase price, a lender can decline to approve the borrower unless a change is made to the purchase price or the size of the downpayment.
- The lender typically submits a request for title commitment to a title company. The title company then examines the quality of the title and any findings from the property survey that is provided (if none exists, it will have to be performed). If all is well, a title commitment and title insurance will be prepared that certifies that the title is free and clear and ready for sale.
- Homeowners' insurance is purchased (or substantiated, if the property being purchased includes homeowners' insurance as part of association fees or similar arrangements), and proof of homeowners' insurance is submitted to the lender.
- Hazard insurance may be required by the lender to protect the asset from fire and storms. If the property is located on a flood plain, then flood insurance may be necessary as well.
Tip: As this process can be long, arduous, seemingly arbitrary, and is often critical to your homebuying transaction, try to prepare these documents (or at least figure out how to prepare them) in advance. Also, do not make any changes to your employment or credit until your transaction is complete (not just until you get a loan commitment letter). This means not switching employers even if it results in a higher income, as counterintuitive as that may sound. It also means not leasing or financing a car, opening a new credit card account, or anything else that can affect your credit report.
Part 3: The closing itself
The closing process itself can span a couple of days or even a week, and in contrast to attorney review states, the transaction is generally not consummated with all parties sitting at the same table. In Texas, an escrow state, closing consists of the following steps:
- A buyer's lender sends final loan documents to the escrow agent and the final closing date is scheduled.
- The closing itself convenes at the office of an escrow agent, closing agent, or title company. The seller generally signs their closing documents first.
- The buyer then signs all closing documents, including the hud-1 (see a sample HUD-1 here), and the final loan documents.
- The buyer pays the remaining funds for their downpayment and closing costs to either the escrow agent, closing agent, or representative of the title company (via cashier's check).
- The deed gets recorded with the appropriate municipality and the transaction is complete.
- The buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.
This document is a community edited guide, is not legal advice, and is subject to changes, modifications, and may contain inaccuracies or out-of-date information. As with any important financial transaction, consult a real estate professional and/or an attorney. See our terms of service for more information.
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