What is escrow?

Two meanings in real estate

People use “escrow” for two different things: the purchase escrow that runs from contract to closing, and the mortgage escrow account (also called an impound account) that a lender maintains for years afterward. Both involve a third party holding money for a specific purpose.

Purchase escrow: how it works

1. Opening — after the purchase contract is signed, the buyer's earnest money deposit, often 1 to 3 percent of the price, goes to the escrow holder.
2. Conditions — the escrow agent tracks the contract's contingencies: inspections, appraisal, loan approval, title review, and any repairs.
3. Documents — the agent collects the deed, loan documents, payoff statements for the seller's mortgage and disclosures.
4. Funding — the buyer's down payment and the lender's loan funds arrive.
5. Closing — the deed is recorded, the seller's mortgage is paid off, commissions and fees are paid, and the seller receives the proceeds.

The escrow holder follows written instructions signed by both parties and cannot release money or documents except as those instructions allow.

Who acts as escrow agent

It depends on the state. In California and much of the West, independent escrow companies or title companies handle escrow. In many Eastern and Southern states, closings are handled by real estate attorneys — some states effectively require an attorney. Escrow and title companies are licensed and regulated, and their accounts are subject to audits.

How long it lasts

A typical purchase escrow with financing takes 30 to 45 days; cash deals can close in a week or two. Delays usually come from loan underwriting, appraisal problems or title issues.

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What happens to the deposit if the deal falls apart

It depends on the contract. If the buyer cancels within a valid contingency — for example, a failed inspection or loan denial — the deposit is normally returned. If the buyer backs out without a contractual reason, the seller may be entitled to keep it, often as liquidated damages. Because the escrow agent is neutral, it will usually release the deposit only with both parties' signed instructions or a court order, so disputes can freeze the money until resolved.

Mortgage escrow accounts

Most lenders require borrowers, especially those with less than 20 percent down or FHA loans, to pay property taxes and homeowner's insurance through an escrow account. Each monthly payment includes principal, interest and one-twelfth of the estimated annual taxes and insurance. The servicer pays the bills when due. Federal rules under RESPA limit the cushion a servicer may hold to two months of payments, require an annual escrow analysis, and require refunds of surpluses over $50. If taxes or insurance rise, the monthly payment increases to cover a shortage.

Escrow fees

Escrow or settlement fees commonly run from several hundred dollars to over a thousand, depending on price and location, and are split between buyer and seller by local custom or agreement. They appear on the Closing Disclosure the buyer receives at least three business days before closing.

Wire fraud warning

Criminals target real estate transactions by sending fake emails that appear to come from the escrow or title company with new wiring instructions. Always confirm wiring instructions by calling a phone number you obtained independently, never one in the email, and be suspicious of last-minute changes. Money wired to a fraudster is often impossible to recover.

Other uses of escrow

Escrow is also used in business acquisitions (holding back part of the price for indemnity claims), online sales of high-value goods, construction (retainage), and legal settlements.

When to call a lawyer

If a deal falls apart and the parties dispute who gets the deposit, or if you suspect fraud or mishandling of escrow funds, a real estate attorney can review the contract and escrow instructions and pursue the money.

Buyers can check an escrow or title company's license with the state regulator before sending any money.