> Escrow Account

Escrow Account

An escrow is a financial agreement where a third party holds assets or money for two other parties completing a transaction. An escrow agent manages the escrow account releasing the assets or funds once contractual obligations are met.

In real estate, there are two types of escrow accounts. When purchasing a property, the prospective buyer provides a good faith deposit, also called earnest money, during the due diligence process. Once the due diligence process is successfully concluded, the escrow funds are transferred to the seller, often used as part of the down payment. If the due diligence process is unsuccessful, the funds will be returned to the buyer. However, if the buyer backs out of the agreement, the escrow funds go to the seller as compensation for lost transaction costs.

The other type of real estate escrow account is established at mortgage closing. It contains future homeowners insurance payments and property tax payments. Under the terms of the mortgage, the buyer will make escrow payments along with principal and interest payments every month.