Buyer Education • 3 min read • January 25, 2026

Escrow Explained in 3 Minutes

Escrow protects both buyers and sellers in real estate transactions. Here's exactly what it is, how it works, and what happens to your money.

What is Escrow?

Escrow is a neutral third party that holds money and documents during a real estate transaction until all conditions are met. Think of it as a trusted middleman that protects both buyer and seller.

The escrow agent (or title company) holds your earnest money deposit, coordinates inspections, manages paperwork, and ensures everyone fulfills their obligations before money and ownership change hands.

      Simple Analogy: You're buying a car from a stranger online. Instead of handing them $20,000 and hoping they give you the title, you both use an escrow service. They hold the money until the seller delivers the title and you confirm the car is as described. Then they release the funds.
    

What Escrow Protects

For Buyers:

Your deposit is safe if the deal falls through due to contingencies
Seller can't take your money and run
You get the property exactly as agreed or you get your money back
Clear title is guaranteed before you pay

For Sellers:

Buyer's deposit proves they're serious
Can't back out for frivolous reasons (after contingencies expire)
Payment is guaranteed before transferring ownership
Protects against fraud or bad checks

How Escrow Works: The Process

1. Offer Accepted

Buyer and seller agree on terms. Escrow account is opened with a title company or attorney.

2. Earnest Money Deposited

Buyer deposits earnest money (typically 1-3% of purchase price) into escrow. This shows you're serious and committed.

3. Due Diligence Period

During escrow, buyer completes inspections, appraisal, and secures financing. Seller provides required disclosures and documents.

4. Contingencies Cleared

Buyer approves inspection, appraisal comes back acceptable, financing is approved. Contingencies are released one by one.

5. Final Walkthrough

Buyer verifies property condition hasn't changed and all agreed repairs are complete.

6. Closing Day

Both parties sign final documents. Buyer's down payment and closing costs are deposited into escrow. Escrow confirms everything is complete.

7. Funds Distributed

Escrow pays off seller's mortgage, pays real estate commissions, title fees, and transfers remaining funds to seller. Deed is recorded and you get the keys.

Two Types of Escrow

1. Purchase Escrow (One-Time)

This is what we've been discussing—the escrow account that holds funds during the transaction. It closes once the sale is complete.

2. Mortgage Escrow (Ongoing)

After you buy, your lender may require an escrow account as part of your monthly mortgage payment. This is different:

You pay 1/12 of your annual property taxes each month
You pay 1/12 of your annual homeowners insurance each month
Lender holds these funds and pays your taxes and insurance when due

This ensures taxes and insurance are always paid (protecting the lender's investment). It's required on most loans with less than 20% down.

      Example: Your monthly payment might be:

      - Principal & Interest: $1,800

      - Property Tax Escrow: $400

      - Insurance Escrow: $150

      - Total Payment: $2,350/month

What Happens to Your Earnest Money?

Your earnest money deposit sits in escrow during the transaction. Three possible outcomes:

1. Deal Closes Successfully

Your earnest money is applied toward your down payment and closing costs. Example: If you put $10,000 in earnest money and owe $50,000 at closing, you only need to bring $40,000 to closing.

2. You Back Out (With Contingencies)

If you back out during the contingency period (inspection, financing, appraisal), you get your earnest money back. This is why contingencies exist.

3. You Back Out (Without Valid Reason)

If you back out after contingencies expire for non-contingent reasons (you just changed your mind), the seller typically keeps your earnest money as compensation.

Who Pays Escrow Fees?

Escrow and title fees typically range from $1,000 to $3,000+. Who pays varies by location:

Some states: Buyer pays all escrow/title fees
Other states: Split 50/50 between buyer and seller
Some markets: Seller pays most or all fees
Always negotiable: Can be part of contract negotiations

Common Escrow Questions

How long does escrow take?

Typically 30-45 days from accepted offer to closing. Cash deals can close faster (7-14 days).

Can escrow fall through?

Yes. Common reasons:

Buyer can't secure financing
Appraisal comes in too low
Major issues found during inspection
Title problems discovered
Buyer or seller fails to meet contractual obligations

Is my money safe in escrow?

Yes. Escrow companies are licensed, bonded, and regulated. Your funds are kept in separate trust accounts and cannot be used for anything except your transaction.

Key Takeaways

Escrow is a neutral third party protecting both buyer and seller
Your earnest money is held safely until closing or return conditions are met
Purchase escrow (one-time) is different from mortgage escrow (ongoing)
Escrow ensures all conditions are met before money and property change hands
You can back out during contingencies without losing earnest money
Typical escrow period is 30-45 days

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