What Is Escrow? The Two Types Every Buyer and Seller Should Understand

Escrow is one of the most used and most misunderstood words in real estate. The reason it confuses people is that it refers to two completely different things: the closing process escrow that holds your earnest money and transaction documents between offer acceptance and closing, and the mortgage impound escrow that collects your property tax and insurance payments after you own the home. Most pages that explain escrow conflate the two without naming the distinction. This page separates them clearly.

Escrow Type 1: Closing Escrow (The Transaction)

When your offer is accepted, both buyer and seller sign the purchase agreement and escrow is "opened." A neutral third party — typically a title company, an independent escrow company, or an attorney’s trust account — takes custody of the earnest money deposit and all transaction documents. This entity is the escrow agent or escrow holder. Neither the buyer nor the seller controls the funds. The escrow agent can only release money and transfer the deed when all contractual conditions are met.

Who Is the Escrow Agent?

The escrow agent is a neutral third party. In the western United States (California, Arizona, Nevada, Oregon, Washington), independent escrow companies handle most closings. In the eastern United States, title companies typically serve as both the title provider and the escrow holder. In attorney states (New York, New Jersey, Massachusetts, Connecticut, the Carolinas, Georgia), a real estate attorney handles the escrow function. The escrow agent’s job is to follow the instructions in the purchase agreement precisely — they do not take sides and cannot modify the terms.

Escrow Type 2: Mortgage Impound Escrow (After Closing)

After you close on a financed home, your lender sets up a separate escrow account — sometimes called an impound account or reserve account — to collect and hold your property tax and homeowner’s insurance payments. Each month, one-twelfth of your annual property tax bill and one-twelfth of your annual insurance premium is added to your mortgage payment. The lender holds this money and pays your tax authority and insurance company directly when those bills come due. You never handle those payments yourself.

Is Mortgage Escrow Required?

For most conventional loans with less than 20% down, escrow is required. For loans with 20% or more equity, you may be able to waive escrow — you would then pay your own property taxes and insurance directly. Some lenders charge a fee (0.125–0.25% of loan amount) to waive escrow. For VA loans, escrow is always required. For luxury jumbo loans, lender policies vary.

The Annual Escrow Analysis

Once per year, your lender performs an escrow analysis to reconcile the amounts collected versus the amounts paid out. If your property taxes or insurance increased, you may have a shortage — your monthly payment increases to replenish the account. If you overpaid, you receive a refund. Under RESPA, lenders can maintain a maximum cushion of two months’ escrow in the account at any time.

What Happens If Escrow Falls Through

If the transaction fails (inspection, financing, appraisal, or title issues), the earnest money deposit is either returned to the buyer or retained by the seller, depending on which party is at fault under the contract terms. The escrow agent cannot release the funds without a signed release from both parties or a court order. Disputes over earnest money can delay return of funds significantly.

What is escrow in real estate?

Escrow has two meanings. During a home purchase, escrow is the period between offer acceptance and closing (30–45 days) when a neutral third party holds funds and documents. After closing, escrow is the account your lender uses to collect and pay your property taxes and homeowner’s insurance monthly.

Who holds escrow money in a real estate transaction?

A neutral third party: a title company, independent escrow company, or attorney trust account, depending on your state. In western states, escrow companies handle most closings. In eastern states, title companies typically serve both roles. In attorney states (NY, NJ, MA, CT), an attorney handles escrow.

How long does escrow take?

Closing escrow (the transaction period) typically takes 30–45 days for financed purchases. Cash purchases can close in 7–14 days. Complex transactions, inspection negotiations, or underwriting delays can extend the timeline.

Can I waive mortgage escrow?

Possibly. Most lenders require escrow for loans with less than 20% equity. With 20%+ down, you may be able to waive escrow and manage tax and insurance payments yourself, though some lenders charge a fee of 0.125–0.25% of the loan amount to do so.