In real estate, going into escrow means a neutral third party takes custody of the buyer’s money and the seller’s deed once a purchase agreement is signed, and holds them until every condition of the contract has been met. The holding period usually runs 30 to 45 days for a conventional mortgage. Neither side can touch the funds or the documents in the meantime, which is the point: it prevents keys from changing hands before the financing, inspections, and title work are actually done.
Who the Escrow Agent Is
The escrow agent (sometimes called an escrow officer or settlement agent) is a neutral party with a fiduciary duty to both sides. They follow the written instructions the buyer and seller agreed to, rather than exercising personal judgment or favoring either party. Depending on where you live, the agent might be an escrow company, a title company, or an attorney. Most are licensed at the state level and are generally required to carry bonds and errors-and-omissions insurance.
Escrow fees vary by region but typically run 1 to 2 percent of the purchase price. On a $400,000 home, that puts the fee somewhere between $4,000 and $8,000. Who pays (buyer, seller, or a split) is negotiable and depends heavily on local custom.
Don’t Confuse This With Your Mortgage Escrow Account
The word “escrow” gets used for two very different things, and mixing them up causes confusion. The transactional escrow described here exists only during the purchase and closes once the deed is recorded and funds are disbursed. A mortgage escrow account (sometimes called an impound account) is a separate, ongoing arrangement your lender may set up after closing, where part of each monthly payment is held to pay property taxes and homeowners insurance.1Consumer Financial Protection Bureau. What Is an Escrow or Impound Account? The rest of this article is about the transactional kind.
What You Hand Over to Open Escrow
Opening escrow starts with delivering the signed purchase agreement to the escrow agent. The agent creates a file, assigns a tracking number, and begins collecting what’s needed to move the deal forward:
- The fully signed purchase agreement, which spells out the sale price, contingencies, and closing timeline. It governs everything the agent does.
- The buyer’s earnest money deposit, usually 1 to 2 percent of the purchase price, wired into the escrow trust account. It’s credited toward the down payment at closing.
- Legal names and taxpayer identification numbers from both sides, so the agent can handle federal reporting at closing.
- Completed escrow instructions covering the property’s legal description, the purchase price, financing terms, and how the buyer intends to take title (for example, as joint tenants or as individuals). The seller provides existing mortgage account numbers so the agent can arrange payoff.
Accuracy here matters more than people expect. Errors in the legal description or lien information can delay the title search by weeks, and an incorrect vesting choice can create estate-planning headaches that are expensive to unwind later.
What Happens During the Escrow Period
Once escrow is open and the earnest money is in, several things run in parallel. The escrow agent coordinates the timing, but a lot of the work is done by outside parties: the title company, the lender, the inspector, the appraiser.
Title Search and Insurance
A title company examines public records to verify the chain of ownership and flag anything that could cloud the title, such as unpaid property taxes, civil judgments, mechanic’s liens, easements, or old mortgages that were never properly released. If the search turns up a lien, the escrow agent gets a payoff demand from the creditor so the debt can be cleared from the sale proceeds at closing. Once the title comes back clean, a title insurance policy is issued to protect the buyer, and typically the lender, against defects that surface later.
Contingency Deadlines
Most purchase agreements include contingencies that give the buyer specific windows to investigate the property and secure financing. The inspection contingency usually runs 5 to 10 business days after contract acceptance, which is when you hire a professional inspector and, if needed, negotiate repairs or credits. The appraisal contingency typically runs 10 to 14 days, because the lender needs the appraised value to meet or exceed the purchase price before it finalizes the loan. A financing contingency protects the buyer if the mortgage falls through entirely.
Missing a deadline without a written extension can be serious. If your inspection period expires and you haven’t formally raised objections, you may lose the right to back out over defects. If your financing contingency lapses and the loan then falls apart, your earnest money could be at risk. Treat every date in the contract like a hard due date, because that’s exactly how the other side will treat it.
Closing Disclosure Review
Federal law requires your lender to deliver the Closing Disclosure at least three business days before you sit down at the closing table.2eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions The document itemizes every fee, the loan terms, your interest rate, and the cash you need to bring. Compare it line by line against the Loan Estimate you received when you applied.3Consumer Financial Protection Bureau. What Can I Expect in the Mortgage Closing Process? If any numbers look wrong, flag them right away. Certain changes to the Closing Disclosure, like a rate increase or the addition of a prepayment penalty, reset the three-day clock and push your closing date back.
What Happens If the Deal Falls Through
Not every escrow makes it to closing. A buyer might fail to secure financing, an inspection might reveal structural damage the seller won’t repair, or the appraisal might come in well below the agreed price. When escrow is canceled, the central question is who gets the earnest money.
If the buyer backs out within a valid contingency period, the deposit is typically refunded. That’s the whole point of a contingency: a contractual exit. If the buyer simply changes their mind after contingency periods expire, or misses deadlines without a valid extension, the seller usually has a claim to the deposit as liquidated damages.
Releasing the funds requires both sides to agree. When they don’t, the escrow agent is stuck; the agent cannot hand the deposit to either party unilaterally. In that case, the agent may file an interpleader action, which turns the money over to a court and asks a judge to decide who deserves it. Both sides then litigate whether they wanted to or not. The escrow agent’s fee agreement typically lets the agent recover attorney’s fees for bringing the action, so a contested $10,000 deposit can generate legal costs that dwarf the deposit itself. The best defense is clear contingency language in the purchase agreement from the start.
Wire Fraud During Escrow
Wire fraud targeting real estate closings has become one of the most common scams in the industry. A criminal intercepts email between the buyer and the escrow or title company, then sends fake wiring instructions that route the buyer’s down payment to the wrong account. Once the wire is sent, the money is usually gone within hours.
The most effective defense is simple. Never trust wiring instructions received by email without verifying them by phone, using a number you already have from earlier in the transaction or from the company’s official website. Don’t use a number included in the email itself. If wiring instructions change at the last minute, treat that as a red flag; legitimate title and escrow companies rarely change bank details mid-transaction. Take extra care with the earnest money wire at the beginning and the closing funds wire at the end, because those are the two moments when large sums are moving.
Closing and Final Disbursement
Closing day arrives once the escrow agent confirms every contractual condition has been met: the lender has funded the loan, the title is clear, contingencies are removed, and all documents are signed. The agent then records the deed at the local county recorder’s office to formally transfer ownership. Recording fees vary by county but are typically modest next to the other costs of closing.
Once the deed is recorded, the agent disburses funds. The seller receives the sale proceeds minus any existing mortgage payoff, agent commissions, transfer taxes, and closing costs. Secondary lienholders are paid from the proceeds too. The buyer receives keys and a final title insurance policy.
How Taxes and Dues Are Split
Property taxes are prorated between buyer and seller based on the closing date. In most of the country, taxes are paid in arrears, meaning the current year’s bill isn’t due until later. If you close on May 1, the seller owes taxes for January through April. The escrow agent calculates the seller’s share and credits that amount to the buyer at closing, so the buyer is made whole when the full tax bill lands months later. Homeowners association dues work similarly but are almost always paid in advance, so the buyer reimburses the seller for the unused portion of the month.
The escrow agent issues a final closing statement that accounts for every dollar in and out of the transaction: purchase price, loan proceeds, earnest money credit, prorated taxes, transfer taxes, agent commissions, and recording fees. Keep this document. You’ll need it for your tax return and potentially for years afterward if questions about the transaction come up.