Escrow is a legal arrangement where a neutral third party (escrow company, title company, or attorney depending on the state) holds money, documents, and instructions until all conditions of a real estate transaction are satisfied.
During the purchase process, escrow:
- Holds the earnest money deposit
- Manages the flow of closing funds from buyer to seller
- Coordinates payoff of existing mortgages and liens
- Records title transfer with the county
- Disburses proceeds to all parties
Ongoing escrow accounts (impound accounts) held by servicers collect monthly amounts for property taxes and insurance, paying them when due — required by many conventional lenders.
Related Terms
1031 Exchange
IRS provision allowing investors to defer capital gains tax by reinvesting sale proceeds into a like-kind property.
Due Diligence
The investigation process a buyer performs before closing — inspections, financials, leases, title, and legal review.
Title Insurance
Insurance protecting the buyer and lender from financial loss due to defects in the property's title.