Why escrow matters

Escrow keeps funds separate from the parties until agreed conditions are completed, reducing the chance of fraud, protecting earnest-money deposits, and ensuring third‑party obligations (title, inspections, financing, taxes, insurance) are met before money changes hands. Escrow is used in both purchase closings (transaction escrow) and in mortgage servicing (impound or mortgage escrow for taxes and insurance).

How escrow works — step by step

  • Earnest‑money deposit: After an accepted offer, the buyer gives earnest money (commonly 1–3% of the purchase price) to an escrow agent or title company. Those funds are logged and held subject to the purchase contract.
  • Condition checks: The escrow agent collects required documents (signed contract, title report, payoff statements, lender instructions) and holds funds while inspections, seller repairs, and loan underwriting occur.
  • Final instructions and closing: When all contract contingencies are cleared, the parties sign closing documents and the escrow agent disburses funds (paying seller net proceeds, paying off liens, and funding the lender).
  • Failed contingencies: If a contingency (e.g., financing) isn’t met and the contract allows termination, the escrow agent follows written instructions for returning funds or distributing them per dispute resolution.

Common triggers for holding or releasing funds

  • Financing contingency satisfied or waived
  • Satisfactory title search and clearing of liens
  • Inspection and repair obligations completed
  • Receipt of required clearances (HOA, municipal certificates)
  • Written closing instructions from lender and parties

Types of escrow you’ll encounter

  • Transaction escrow (purchase/sale escrow): Holds earnest money, down payment, and closing funds until title and contractual obligations are satisfied.
  • Mortgage/impound escrow: A servicer collects monthly amounts to pay annual property taxes and hazard insurance on the borrower’s behalf; funds are disbursed as bills come due. See our deeper guide on mortgage impounds for taxes and insurance for details: “When Lenders Require Mortgage Impounds: Taxes and Insurance Escrows” (https://finhelp.io/glossary/when-lenders-require-mortgage-impounds-taxes-and-insurance-escrows/).

Who chooses the escrow agent and who pays the fees?

State custom and the purchase contract determine who selects the escrow holder. Fees can be split or borne by one side depending on local custom and negotiation. Lenders often require a specific escrow arrangement for mortgage impounds. Read a practical primer for buyers in “Everything Homebuyers Should Know About Mortgage Escrow Accounts” (https://finhelp.io/glossary/everything-homebuyers-should-know-about-mortgage-escrow-accounts/).

How disputes and refunds are handled

Escrow agents act according to the written escrow instructions. If parties disagree about releasing funds, common paths are: mutual written release, mediation/arbitration per the contract, or court order. Keep records and confirm the escrow instructions allow your intended refund path.

Key differences: transaction escrow vs. mortgage escrow

  • Transaction escrow is a short‑term, conditional holding during a sale or refinance.
  • Mortgage escrow (impound) is ongoing, built into your mortgage payment, and intended to ensure taxes and insurance are timely paid.

Practical tips — what I recommend to clients

  1. Get the escrow instructions in writing and review them line by line. Insist on the timeline for releases and who signs off.
  2. Verify the escrow agent’s identity and licensing (title companies and licensed escrow officers are common). Check the American Land Title Association (ALTA) consumer resources and state regulator pages.
  3. Track deposits and request receipts. If you wire funds, confirm wiring instructions independently by phone to a verified number—wiring fraud is common.
  4. Know your contingency deadlines. A missed contingency date can forfeit the right to recover earnest money.
  5. For mortgage escrow accounts, review annual escrow analyses and statements — servicers must provide an annual escrow disclosure and notify you of any shortages or overages (Consumer Financial Protection Bureau guidance: https://www.consumerfinance.gov/).

Common misconceptions

  • “Escrow equals the lender’s account.” Not always — escrow for a purchase is neutral and controlled by the escrow agent under contract terms; mortgage escrow accounts are managed by your loan servicer.
  • “Earnest money is always refundable.” Refundability depends on contract contingencies and local law; read your purchase agreement.

Real‑world example

A buyer deposits earnest money into escrow after the seller accepts the offer. The buyer’s loan condition requires an appraisal and final underwriting; the inspection reveals minor repairs. The escrow agent holds funds until repairs are verified and the lender issues final approval — then the agent disburses funds and the sale closes. If the buyer’s financing falls through under a valid financing contingency, escrow returns the deposit per the contract.

Further reading

Authoritative sources

Professional disclaimer

This content is educational and does not constitute legal or financial advice. For transaction‑specific guidance, consult a qualified real‑estate attorney, title company, or licensed escrow agent in your state.

(From the author: in my 15 years advising homebuyers and sellers, clear escrow instructions and early communication with the escrow holder prevent most disputes and delays.)