Learn · Topic 8
Closing & Escrow Basics
Closing is where title work turns into a recorded deed and a funded loan. Here are the moving parts every title professional should know.
DISCLAIMER: For informational and educational purposes only. Nothing here is legal advice, a title opinion, or a commitment to insure, and no attorney-client relationship is created. No one may rely on this content for any transaction or legal decision. Coverage is governed solely by the terms of an issued policy or commitment, and requirements vary by state and underwriter. Consult your own attorney and underwriter. Views are my own and not those of my employer.
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The escrow role
- The settlement agent holds funds and documents in trust and releases them only when the written closing instructions are satisfied.
- Escrow funds are typically kept in a separate escrow account, and many states have good funds laws limiting disbursement to collected or certain funds.
The closing package
- Settlement statement: the line-by-line accounting of who pays what (ALTA publishes standard settlement statement forms).
- Payoff letters for existing liens, owner's affidavit, entity authority documents, the deed and security instrument, and tax prorations.
- Everything should match the commitment's Requirements.
Wires and fraud
- Wire fraud is a major closing risk. Confirm wiring instructions by calling a known, independently obtained number, never one from the email that sent the instructions.
- Treat any last-minute change to payoff or proceeds instructions as a red flag.
Closing protection letters
- A closing protection letter (CPL) from the title insurer protects the lender (and often the buyer) against loss from the issuing agent's fraud or dishonesty in handling funds or documents, or failure to follow written closing instructions, as the letter specifies.
- CPL terms and availability are regulated by state.
The gap and recording
- The gap is the time between the commitment's effective date and recording of the insured documents. Bring the title search down to closing, and record promptly.
- The 2021 owner's policy covers certain gap matters (Covered Risk 10), but insurers still manage gap risk with bring-downs, affidavits and prompt recording.
- After recording, the final policy issues. A marked commitment or pro forma policy shows the agreed coverage at closing.
Tax reporting and withholding
- FIRPTA: when the seller is a foreign person, the buyer generally must withhold a percentage of the amount realized and remit it to the IRS unless an exemption applies (the usual rate is 15%).
- 1099-S: the settlement agent generally reports the seller's gross proceeds to the IRS.
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