What Is Escrow and How Does It Work?

Jeana Beech
Jun 24
2 min read

If you're buying or selling a home, you’ll likely hear the word “escrow” come up often. It may sound complicated, but it’s a crucial part of keeping your transaction safe and smooth.

Let’s break down what escrow is, how it works, and why it matters.

What Is Escrow?

Escrow is a neutral third-party account that holds money and documents during a real estate transaction. It protects both the buyer and the seller by ensuring that no funds or property change hands until all agreed-upon conditions are met.

Think of escrow as the middleman that keeps everyone honest and everything on track.

When Is Escrow Used in Real Estate?

Escrow is used in two major ways:

During the Home Purchase Process
A buyer deposits earnest money (a good-faith deposit) into an escrow account. The escrow company holds that money while inspections, appraisals, and other conditions are completed.
After the Purchase — For Taxes & Insurance
Most mortgage lenders set up an escrow account to collect a portion of your property taxes and homeowners insurance each month along with your mortgage payment.

How the Escrow Process Works (Step-by-Step)

1. Offer Accepted

Once the buyer and seller agree on terms, the buyer deposits earnest money into an escrow account.

2. Escrow Opens

The escrow company collects the purchase agreement and starts managing the timeline and legal documents.

3. Inspections, Appraisals & Negotiations

Escrow holds funds while the buyer conducts inspections, secures financing, and the lender appraises the home.

4. Loan Approval & Final Review

Once the loan is approved and all paperwork is ready, the buyer signs final documents.

5. Closing Day

The buyer wires the remaining funds. Escrow releases the payment to the seller and the title transfers to the buyer.

6. Escrow Closes

All parties are paid, and escrow is officially closed!

Why Escrow Is Important

Escrow protects both parties in the transaction:

Buyers are assured that sellers won’t take the deposit and back out.
Sellers know that funds are secure before handing over ownership.
Lenders are confident that taxes and insurance will be paid on time.

Final Thought

Escrow may sound technical, but it’s one of the most important tools in keeping your home purchase safe, fair, and transparent. Whether you’re buying or selling, your real estate agent and escrow company will guide you every step of the way.