Escrow
A neutral third-party account that holds funds or documents until specific conditions of a transaction are met.
What is Escrow?
Escrow is a financial arrangement in which a neutral third party holds and regulates the payment of funds or documents on behalf of the transacting parties until all conditions of a transaction are fulfilled. In real estate, escrow refers to two distinct things: (1) the closing escrow process, where a title company or escrow officer holds the buyer's funds and transaction documents until all purchase conditions are met and the deed is transferred; and (2) the ongoing mortgage escrow account, where a portion of each monthly mortgage payment is held by the lender to pay annual property taxes and homeowners insurance as they come due. Escrow accounts prevent homeowners from falling behind on these mandatory expenses, protecting the lender's collateral.
Example
A homebuyer making a $500,000 purchase puts $15,000 in earnest money into escrow. When the home inspection reveals a roof issue, the escrow agent holds the funds while the buyer and seller negotiate a price reduction. The escrow agent ensures that neither party receives the money until all conditions — including the inspection contingency — are resolved and all closing documents are signed.
Source: Consumer Financial Protection Bureau — Escrow Accounts