November 8, 2021


Buying a home is the biggest financial decision many of us will ever make. There are so many terms and processes (such as the escrow process) that  it can be overwhelming.

If you want to buy a house but don't know what escrow means or how it works, this guide is for you! We’ll walk you through all the details of what escrow means in simple language that's easy to understand. 

Even if you're not ready to buy right now, this guide will help educate yourself about important terminology used in real estate transactions for when the time comes!

Understanding What “In Escrow” Means

Items in escrow are handled by a trustee or an escrow agent. Usually, this is a third-party service. The escrow agent holds the assets until a predetermined contract is fulfilled. In this case, it’s the Agreement of Sale between the home buyer and the home seller. 

During an escrow agreement, terms between each party are agreed upon and outlined. After the contract is reached, the deposit is distributed to the appropriate escrow agent, and the proceeds of the money or property will be released to the appropriate party.

In simple terms, escrow houses the funds from an offer on a house until all of those funds are used for what they were intended for. The seller will not receive the money you have in escrow until all contract agreements are signed and you officially own the house. 

In real estate transactions, this money usually includes what was agreed upon as earnest money.

Understanding What “In Escrow” Means

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When Is Escrow Needed In A Mortgage?

In a real estate transaction, escrow is what holds the money from your down payment until the mortgage servicer receives the title to the property or deed of trust that proves you own it. In simple terms, what you are buying goes into escrow while what you owe goes into another account.

How Do I Set Up An Escrow Account?

To open an escrow account, you will need to speak with your mortgage lender. You can ask him or her any of the following:

  • What is the mortgage provider's name and contact information? 
  • How much money should be in my mortgage payment each month? 
  • Who do we pay the mortgage to each month?  

Escrow has a lot of meanings and terms so always ask questions if you don't know what something means. If you're buying a home, these questions will help you educate yourself throughout the process. Escrow agents hold your down payment until what you owe is paid for; then those funds are returned to you. Your mortgage lender holds your monthly mortgage payments until those mortgage payments go towards paying off the loan.

How Do Escrow Accounts Work?

Most of the time, what you owe will go into an account with your lender. This type of account is what's known as an escrow account. 

There are two types of escrow accounts involved in the home buying process and homeownership. The first type of escrow account protects your earnest deposit when you make an offer on a house. Once the real estate transaction has gone through, the seller receives the money from that account as part of the down payment. 

The second type of escrow account is opened by your mortgage company. As you pay your monthly mortgage payments, the lender will put aside some of the payment to go towards your homeowners insurance and property taxes.

Escrow Accounts For Home Buying

There are many types of escrow accounts for home buying. The main purpose of an escrow account for real estate transactions is to make sure everyone has what they need for the transaction. This ensures no legal problems arise and everyone gets what's fair.

When Is An Escrow Account Required?

There are many reasons when an escrow account might be necessary. These include, but are not limited to:

  • New Construction
  • Property Exchanges
  • Condominium Conversions
  • FHA Loan Requirement

How Do I keep Track Of My Escrow Account?

The details about an escrow account are clearly laid out in the loan agreement that home buyers sign when they are approved for a mortgage loan. You should receive this document when you first apply for a home loan. If you did not receive this document, we recommend talking to your mortgage lender and asking them where the documents may be.

To keep track of escrow account information there are several websites and other services that enable you to monitor what is in the account. In some cases, you need online access  to know what is happening to your money. Most people prefer to know how much they owe and how much the remaining balance of their escrow account is. If you're one of those people we recommend contacting your lender and asking them what kind of services and accounts they offer.

How Can My Escrow Account Balance Be Tracked?

There are several means of account balance tracking methods. However, the most proactive way to keep track of your escrow account balance is to contact your lender.

How Does An Escrow Account Work When Buying A Home?

When you buy a home, you usually include a personal check - 1% to 2% of the purchase price. This is called an earnest money deposit and shows the seller of the home that you are a serious buyer. The check will not be deposited until the seller accepts the offer. 

If the offer is accepted the money will be kept in a separate escrow account until the transaction closes. This money is used for your downpayment and closing expenses. If the money is accepted by the seller, the loan could be paid for the closing cost or remuneration. If your offer is denied, your money will be returned.

How Does The Escrow Process Work?

Both the buyer and seller will sign a contract that is sent to the escrow company. The contract states what expenses are covered and who's responsible for any additional costs. After everything is finalized, money is paid to the creditors and the real estate agent gets their commission. 

If everything goes smoothly, you may close escrow within 30 - 45 days of signing the contract. This starts with paperwork on both sides of the transaction, such as loan documents, disclosure statements, title reports, property inspection reports, etc. Finally, money is exchanged between all parties involved in the transaction plus whatever else was specified.

How Much Money Goes Into Escrow?

The amount of money that you’ll put into escrow is 1% to 2% of the home’s purchase price or your offer on the home. 

Once the offer is accepted, the money is held in an escrow account until the settlement date. The money in this account is put towards the down payment of the property.

How Much Money Goes Into Escrow?

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How Much Does Escrow Cost?

When considering escrow fees, you should also remember that they are negotiable.

When you complete a transaction, earnest money placed with escrow is used towards a down payment. Earnest money in escrow is not a fee though you should be wary of the possibility of forfeiting that money if you can not come to terms with your seller on the sale price.

How Long Do You Pay Escrow?

An escrow account ends on the day of settlement. Once you have secured a mortgage, completed all necessary inspections, and insurance payments, the real estate deal can go through. 

On the day of settlement, the money in this escrow account goes towards your down payment and escrow agents close the account. So, it is only open between when your offer on the house is accepted by the seller and when you go to settlement.

Can I Negotiate With An Escrow Company?

Yes, you can negotiate with some escrow companies, but only about certain services. You can ask an escrow company about extra fees such as disbursements, wire transfer fees, etc.

How Does Escrow Disbursement Work?

An escrow disbursement is a mortgage lender paying property taxes and homeowners insurance on behalf of the borrower. This can be done in monthly or annual installments. If your mortgage company does not use escrow you may need to set up an account yourself either for payment of taxes and insurance premiums. Then, send the mortgage company proof of what you paid at closing to ensure they reimburse you if needed.

When Do Escrows Close?

Escrows close when buyers pay more than 50% of the loan amount. At this point, mortgage lenders will also release any due-on-sale clauses and begin the transition into days where you own your home free and clear. Once it closes, the title transfers from seller to buyer.

Can You Have An Escrow Account Without A Mortgage?

You can have an escrow account without a mortgage and still be able to make a difference in your budget.

Even with no mortgage, homeowners still have to pay property taxes and homeowners insurance. An escrow account may be designed to handle your taxes or homeowners insurance bills. You simply open a bank account and deposit monthly payments to be used when the bills are due.

If you bought a house with no mortgage, you will still be able to make a difference in your budget since you'll have this extra money dedicated towards monthly payments and other expenses such as groceries, utilities, etc.

Advantages And Disadvantages Of Escrow

There are plenty of advantages to having escrow accounts. Not only does it keep your money safe during the home buying process, but you can use an escrow account for your property tax payments, mortgage insurance, and monthly insurance payment. 

Some disadvantages of escrow accounts include paying fees to the escrow officer during the escrow period including late or administrative fees. 

Overall, though, escrow accounts are good and should be used when buying a home to keep the good faith deposit safe.

What Does Escrow Mean - FAQs

See the most asked questions

What does it mean to be in escrow on a house?

When you are in the process of buying a house you'll deposit money into an escrow account. This money is not given to the seller until all inspections and contracts have gone through.

How does escrow work?

When you complete a real estate transaction, your earnest money will be kept in escrow. This money is used towards the down payment or can be applied to an existing loan on the property if there is one. Escrow will close once you pay more than 50% of the mortgage amount.

What does escrow mean in simple terms?

Escrow is when the buyer holds money with a lawyer or company until all the requirements are met. Then, you can get the money to pay for closing costs and anything else.

Is escrow good or bad?

Escrow is mostly good. It protects the buyer and seller if anything goes wrong before closing. One downfall of using an escrow company when buying a home are the additional fees that come with the service.

Wrap Up

When it comes to buying a house for the first time, knowing the expected costs, timelines and what’s required from all parties will make the home buying process easier for everyone. 

Understanding the details of how an escrow account works and how it fits together with the other steps in the process is key when buying your own property.

Through this article, I hope that you now have a clearer idea of what's involved and that you're that much closer to becoming a homeowner.

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

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