What is escrow?

Escrow is a financial contract where a third party holds and manages payment of funds required for the two parties — the buyer and seller — involved in a given transaction. To protect both sellers and buyers from possible fraud, an escrow agency ensures that each party meets all the conditions in their agreement. Escrow is frequently used in contracts to purchase a home.

Deeper definition

Escrow transactions enlist the help of a third party to oversee that the terms of a contract governing a transaction are completely satisfied. When buying a property, the buyer wants to ensure that everything about the property is in accordance with what she expected to get; when selling a property, the seller wants to guarantee that the buyer won’t suddenly disappear with or consume the property before paying.

The buyer may put her money into an escrow account, and the seller may retain ownership of the property until the escrow account receives the money. The escrow account holds onto the money until the conditions of the buying agreement are met, upon which the money is disbursed to the seller and the buyer gets the property she paid for. In return for his services, the escrow agent receives a small transaction fee.

Escrow is not only common in buying a home, but also in maintaining the mortgage on that home. Many lending companies require the buyer to put money in escrow to cover expenses such as property taxes and homeowner’s insurance, because if the borrower fails to make those payments then the lender is at risk.

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Escrow example

Clarice purchases a very expensive gold watch from an online auction site. In order to protect the considerable amount she spent on it, she puts the total sum in an escrow account that the seller agrees to, for release after the watch is received. The watch is shipped and shortly arrives with Clarice. After ensuring that it’s a genuine article, she instructs the escrow agent to release the funds, and the buyer gets paid.

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