What happens during escrow when the house is under contract?

The 2024 FHA Loan Handbook

Reader question: “We will soon be purchasing our first home, so we are trying to learn about the buying process. I’m not very clear on the whole escrow thing. What can we expect when the house is under contract or in escrow? And do these two terms basically mean the same thing? What happens during this part of the process?”

A lot can happen during the escrow process, and the process can be different from one home buyer to the next. With that being said, there are certain things that happen in most real estate scenarios. So let’s focus on those commonalities.

What Does it Mean to Be Under Contract?

Let’s start with your first question. Is being “under contract” the same thing as being “in escrow”? Technically, they are two different things. But the two terms are generally used interchangeably. A home is considered to be “under contract” when a purchase agreement has been signed by both parties, the buyer and seller.

The seller(s) can continue to receive offers from other buyers during this period, if they choose to. But the fact that you are under contract / in escrow means that they probably won’t accept another offer — at least, not for the time being.

During this stage of the home buying process, the escrow company will step in to manage the whole escrow process. This is when you put funds into an account to facilitate the purchase of the home, the transfer of the deed, etc. So you will be under contract first, and shortly after that you will go into an escrow process. This is how it works in a typical home buying scenario.

What Happens During the Escrow Process?

So, what happens during the escrow process, once the house is under contract? Here are the typical steps that take place:

Inspection: As the home buyer, you will probably want to have a home inspection done on the property. This is where a licensed inspector examines the property for defects, hazards, and other issues. You might pay $200 – $400 for the inspection, depending on the size of the property and the state in which you live. That’s a small price to pay for the peace of mind you get. The inspection usually happens within days of going under contract and into escrow.

Appraisal: Your mortgage lender will also have the home appraised while it is under contract. Definition: To “appraise” a property is to determine its monetary value in the current market. They will use the purchase agreement as the starting price, and then they’ll have a licensed home appraiser assess the value to make sure it’s worth at least the amount you have agreed to pay. This is a standard requirement anytime a mortgage loan is used to purchase a house.

Underwriting: If you’re using a home loan to buy a house, you will eventually go through the underwriting process. This happens during escrow — after the contract has been signed and before the final approval process. The underwriter will review all loan documents to make sure you meet the lender’s requirements, as well as any requirements imposed by the FHA, Freddie Mac, etc. Chances are, you will probably have to provide additional documents to the mortgage underwriter, while the home is under contract / in escrow.

Communications: You’ll also want to stay in close contact with the escrow company or agent who is handling the closing process. You want to ensure they have everything they need in terms of paperwork, and that everything is still on track for closing day. Your real estate agent should help you with this, if you’re using an agent.

So that’s a quick overview of what happens when the house is in escrow and under contract. There’s the home inspection, the home appraisal, sometimes a termite/pest inspection, the mortgage underwriting process, probably some additional requests from the underwriter, and … eventually … the closing process itself.

If you have additional questions about the escrow process, or buying a house in general, be sure to use the search tool at the top of this page. Our website offers hundreds of useful articles and tutorials.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author

The 2024 FHA Loan Handbook