Escrow
Definition and meaning of Escrow in real estate.
Escrow is a legal arrangement where a neutral third party holds funds, documents, or property until specific conditions of a real estate transaction are met. It can also refer to an account set up by a mortgage lender to pay for the homeowner's property taxes and insurance.
In more detail
During a home purchase, the buyer's earnest money deposit is held in an escrow account rather than going directly to the seller. This protects both parties, ensuring the buyer does not lose their money if the seller fails to meet contract conditions, and showing the seller that the buyer has the funds to proceed.
Once the transaction closes, the escrow officer distributes the money and files the deed. Additionally, lenders often require borrowers to pay a portion of their taxes and insurance monthly into an escrow account, from which the lender pays these bills annually.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Also known as | Impound account (when used for taxes and insurance) |
| Managed by | Escrow agent, title company officer, or closing attorney |
| Who pays fees | Typically split equally between buyer and seller, depending on local custom |
A buyer deposits ten thousand dollars into an escrow account after their offer is accepted, and these funds remain protected there until the home inspection and title search are successfully completed.
Frequently asked questions
Can I manage my own property taxes and insurance instead of using a lender escrow account?
Yes, some lenders allow borrowers to opt out of escrow if they make a larger down payment, though the lender may charge a fee or a slightly higher interest rate for doing so.
What happens to the escrow deposit if the sale falls through?
If the transaction is canceled based on a valid contract contingency, the money is typically returned to the buyer. If the buyer defaults without a legal excuse, the seller may be entitled to keep the deposit.
Related terms
Sources & references
See our sources and editorial standards.