How Escrow Works: Agents, Mortgage Accounts, and Wire Fraud

Escrow is how a home sale gets done safely: a neutral third party holds the buyer’s money and the seller’s documents until every condition in the purchase contract is satisfied, then releases both sides at the same moment. Understanding how escrow works matters twice over, because many homeowners also pay into a second, separate escrow account each month after closing to cover property taxes and homeowner’s insurance. The two uses share a name and a basic idea — someone neutral holds funds for a specific purpose — but they operate under different rules.

The Role of the Escrow Agent

The escrow agent is usually a title company, an attorney, or a licensed escrow company. Whoever fills the role owes a fiduciary duty to every party in the deal, which means strict compliance with the escrow agreement, impartial handling, and safeguarding the money. The agent represents all parties equally and cannot give advice or take sides.

One rule enforces that neutrality: the agent acts only on written instructions signed by everyone. If a buyer wants funds released, the seller must also sign off before anything moves. An agent who releases money or takes action without proper authorization can be held liable for negligence or breach of contract. The escrow agreement generally limits the agent’s job to what the contract spells out, keeping the agent administrative rather than discretionary.

Deposits are held at FDIC-insured banks, and the coverage can pass through to the actual owner of the funds — not the agent whose name is on the account — when the bank’s records identify each beneficial owner.¹ Each owner’s share is insured up to the standard $250,000 limit.² States also regulate escrow providers through licensing and bonding, though the rules vary; before you pick a provider, confirm they are properly licensed through your state’s financial regulator.

What You Need to Open Escrow

Every escrow starts with a fully executed written purchase agreement that identifies the buyer, seller, price, and legal description of the property. Alongside it, the buyer submits an earnest money deposit, typically one to three percent of the purchase price. Both sides provide identification, and the contract lists the contingencies — conditions like a satisfactory inspection or a successful appraisal — that must be met before closing. Deadlines for completing those contingencies commonly run 10 to 17 days.

Once the agent has these materials, they draft formal escrow instructions that spell out tax identification numbers, exact dollar amounts for every credit and debit, and the anticipated closing date. All parties sign the instructions before the agent begins holding or disbursing anything. From that point forward, those instructions govern every move the agent makes.

What Happens Between Opening and Closing

After the paperwork is signed, the agent assigns the escrow a file number and prepares to receive funds. Buyers usually deliver the earnest money by wire or cashier’s check so it can be verified and cleared. The active escrow period that follows typically runs 30 to 45 days.

During that window, the agent coordinates several threads at once. A title search confirms the property is free of liens and other claims that could block the transfer. If the buyer is financing the purchase, the agent tracks loan approval and the arrival of mortgage documents from the lender. The agent also watches each contingency deadline, making sure inspections, appraisals, and any repair negotiations finish on time. Every step is documented against the escrow instructions.

The process ends in a coordinated swap. Once all contingencies are cleared and the full purchase price is in the account, the agent sends the funds to the seller and the deed to the local government recording office. Recording the deed creates the public record of the ownership change, and the buyer gets clear title at the same moment the seller gets paid. That simultaneous exchange is the whole point of escrow.

The Closing Disclosure and the Three-Day Rule

Federal law requires the lender to deliver a Closing Disclosure to the buyer at least three business days before closing.³ The five-page form replaces the older HUD-1 and itemizes every cost in the deal. Page 2 separates services the borrower did not shop for (such as the appraisal and credit report), services the borrower did shop for (such as the title and settlement agent), and the initial escrow deposit collected for taxes and insurance.⁴

Three changes after you receive the disclosure restart the three-business-day clock: the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added. In those cases the lender must issue a corrected disclosure and wait again before closing.³

The Mortgage Escrow Account After Closing

The transaction escrow ends when the deal closes, but many buyers immediately start paying into a different escrow account tied to the mortgage. This account, sometimes called an impound account, lets the lender collect monthly deposits that it uses to pay the property tax bill and the homeowner’s insurance premium when they come due. The Real Estate Settlement Procedures Act caps how much the servicer can collect and hold.⁵

Monthly Caps and the Cushion

Each month, the servicer can collect no more than one-twelfth of the total annual estimated taxes, insurance, and related charges.⁵ On top of that, the servicer may keep a cushion to absorb unexpected increases, but the cushion cannot exceed one-sixth of the estimated annual disbursements, which is roughly two months of payments.⁶ At closing, the lender can also collect an initial deposit that covers the gap between the closing date and the first regular payment, plus the same one-sixth cushion.

Annual Analysis, Surpluses, and Shortages

Your servicer must run an annual escrow analysis and send you a statement within 30 days of the end of the computation year.⁷ The statement lists every deposit you made, every payment the servicer sent out, and whether the account is running a surplus or a shortage.

A surplus of $50 or more must be refunded within 30 days. Smaller surpluses can be refunded or credited to next year’s payments, at the servicer’s option.⁷ This refund rule applies only if you are current on your mortgage, meaning the servicer received your payment within 30 days of the due date.

If the analysis finds a shortage, the servicer’s options depend on its size:

If the shortage is less than one month’s escrow payment, the servicer can leave it in place, ask you to pay it within 30 days, or spread repayment over at least 12 months.
If the shortage equals or exceeds one month’s escrow payment, the servicer can leave it in place or spread repayment over at least 12 months, but cannot demand a lump-sum payment.⁷

Interest on the Balance

Federal law does not require lenders to pay interest on mortgage escrow balances. Roughly a dozen states, including New York, California, Connecticut, Massachusetts, and Minnesota, require interest on escrow funds for certain residential mortgages.⁸ A 2025 federal proposal by the Office of the Comptroller of the Currency would preempt those state requirements for nationally chartered banks, so coverage may change for some borrowers. Any interest you earn is taxable; if the total is $10 or more, you should get a Form 1099-INT, and you must report all taxable interest even if you do not receive a form.⁹

Opting Out of Mortgage Escrow

Not every borrower is required to keep a mortgage escrow account. Federal regulations state that when loan documents are silent on the point, other federal or state law decides whether a servicer can set one up.⁷ In practice, lenders usually require escrow when the down payment is under 20 percent, and some loan programs — FHA and VA among them — require it regardless of equity. If you have at least 20 percent equity in a conventional loan, you can ask your servicer about waiving escrow, though the lender may charge a small rate adjustment or fee for the waiver. Waive it, and you take on paying the tax and insurance bills directly, so you need to budget for those lump sums yourself.

If the Deal Falls Through

Sometimes a purchase collapses after escrow has already opened. The agent cannot just hand the deposit back to one side. Because the agent acts only on mutual written instructions, both the buyer and seller have to sign cancellation instructions that say exactly how the money will be split. Until both signatures arrive, the funds stay put.

Disputes over earnest money are common when a deal fails. The buyer may argue a contingency was not met and demand a full refund; the seller may claim the buyer breached and insist on keeping the deposit. If the sides cannot agree, the agent can file an interpleader action, a court proceeding that lets the agent deposit the disputed funds with the court and let a judge decide who gets them.¹⁰ Federal courts have jurisdiction over interpleader when the amount in dispute is $500 or more. Once the agent deposits the funds and is discharged, the buyer and seller litigate between themselves. The escrow agreement typically lets the agent deduct its legal fees for the interpleader from the deposit before handing the rest to the court.

Wire Fraud at Closing

The single biggest danger to a homebuyer during escrow is wire fraud. Criminals watch real estate transactions, sometimes by hacking the email of an agent, attorney, or title company, and then send fake wiring instructions that redirect the buyer’s funds to an account they control. The FBI has documented individual schemes netting anywhere from $10,000 to more than $1,000,000.¹¹ Wire transfers move almost instantly and are very hard to reverse, so victims often lose their entire down payment.

Protect yourself with a short routine. Before wiring anything, call your escrow agent or title company at the official phone number you already have on file, not a number from an email, and verify the wiring instructions by voice. Treat any last-minute change to account or routing numbers, especially one that arrives by email, as suspicious until you have confirmed it. If you suspect fraud, report it immediately to the FBI’s Internet Crime Complaint Center at ic3.gov; fast reporting gives law enforcement the best chance of recovering the money.¹¹

1
FDIC. Pass-Through Deposit Insurance Coverage
2
eCFR. 12 CFR Part 330 – Deposit Insurance Coverage
3
Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
4
Consumer Financial Protection Bureau. Closing Disclosure
5
Office of the Law Revision Counsel. 12 USC 2609 – Limitation on Requirement of Advance Deposits in Escrow Accounts
6
eCFR. 12 CFR Part 1024 – Real Estate Settlement Procedures Act (Regulation X)
7
Consumer Financial Protection Bureau. 1024.17 Escrow Accounts
8
Federal Register. Preemption Determination: State Interest-on-Escrow Laws
9
Internal Revenue Service. Topic No. 403, Interest Received
10
GovInfo. 28 USC 1335 – Interpleader
11
FBI. Fraudsters Are Stealing Land Out from Under Owners