What Is Escrow And How Does It Work?

Published date: Sep 20, 2016

paper with word escrow 

You may not have heard the word “escrow” before you stepped into the world of home buying, but you’ve heard it now. “Escrow” is part of what makes buying and selling homes a little more organized, and provides some measure of security for both sides in case the sale falls through.

What is Escrow?

Escrow” occurs when one party deposits money intended for a second party for safekeeping with a third party, until certain conditions are met.

For example, Bob has offered to buy George’s house in San Francisco. However, they need to hammer out some details first, because George’s house needs a new roof before Bob will meet his asking price. George is willing to replace the roof, but only if he knows Bob is in earnest about making the offer.

How does Escrow Work?

Bob and George decide to let Tom hold onto some “earnest money” put up by Bob until the roof is replaced. That way Bob has shown good faith, and George knows that if he fixes the roof and Bob decides not to buy the house, Bob will forfeit the earnest money to George to defray the expense of the new roof.

So Bob writes Tom a check and George fixes the roof, and the earnest money is applied to the purchase price of the house. If George fixes the roof and Bob suddenly decides to move to Albuquerque instead, Tom gives the earnest money to George who puts his house back on the market – now with a new roof.

Who Holds the Escrow?

In this little story, Bob is the buyer and George is the seller. Tom can be one of several things - an escrow officer from an escrow company, someone from a title company, an official from a title & escrow company, or a title & escrow attorney.

How Much is Escrow?

Both custom and local market conditions will factor into how much earnest money is asked for to be placed in escrow. The amount typically totals about 1 to 2 percent of the cost of the home.

When is Escrow Required?

Escrow is commonly required from the potential buyer in most home sales. It is written into the contract drawn up, with stipulations detailing the expectations and conditions for escrow to be released. These are called contingencies.

As each contingency is met, the buyer and seller sign off on it. After all contingencies have been signed off on, the loan amount is funded, and closing accomplished. Escrow is released and a new deed is recorded for the property under the buyer's name. The loan funds are disbursed, the seller is paid for the home, real estate agents and other parties involved are paid their fees, and the sale is final. 

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