Escrow is an arrangement in which a neutral third party holds money, documents or both on behalf of two other parties until specific conditions are met. In real estate, the word shows up in two common ways: the escrow process used to close a purchase, and the escrow account a mortgage lender uses to pay property taxes and insurance.
In both cases, the goal is the same: protect everyone by making sure no one gets the money or the property until they have done what they agreed to do.
Purchase escrow
When you buy property, an escrow or title company (or in some states an attorney) acts as the neutral holder. During escrow:
- The buyer deposits earnest money after the purchase agreement is signed.
- The escrow holder collects documents, loan funds and instructions from both sides.
- The buyer works through contingencies, such as inspection, appraisal and loan approval.
- Once all conditions are met, the escrow holder records the deed, pays off the seller’s loan, disburses funds and “closes escrow.”
If the deal falls apart, the purchase agreement usually determines who gets the earnest money.
Mortgage escrow accounts
Many lenders also set up an escrow account (sometimes called an impound account) as part of the loan. Each monthly mortgage payment includes an extra amount for property taxes and insurance. The lender holds those funds and pays the bills when they come due. Lenders review the account periodically and adjust the monthly amount if costs change, which can create a shortage or surplus.
Example
A hypothetical investor buys a rental for $425,000 and deposits $12,000 in earnest money with an escrow company. Over 30 days, the inspection is completed, the appraisal comes in at value, and the loan is approved. The escrow company then collects the down payment and loan funds, records the deed, pays the seller and closes escrow.
Why it matters for landlords
Escrow protects you when you buy or sell, and it is central to a 1031 exchange, where proceeds must flow to a qualified intermediary instead of to you. On the mortgage side, escrowed taxes and insurance should be recorded correctly so your books match reality. TenantLoop accounting lets you split a mortgage payment into principal, interest and escrow so each piece lands in the right account. Do not confuse escrow with a trust account, which property managers use to hold client funds.
Related terms
Related questions.
What happens to the earnest money if a purchase falls through?
The purchase agreement usually decides it. The escrow holder keeps the deposit until the conditions in that agreement say who receives it.
Why did my mortgage escrow payment change?
Lenders review escrow accounts periodically. If property taxes or insurance went up or down, the monthly amount is adjusted, which can create a shortage or a surplus.
Is escrow the same as a trust account?
No. Escrow is a neutral third party holding funds for a deal or a loan. A trust account is the account a property manager uses to hold owners' rent and tenants' deposits.