What an escrow account is and who opens one
An escrow account is a separate bank account held by a neutral third party—usually your mortgage lender, a title company, or an attorney—that holds money on your behalf until a transaction closes. You do not open it yourself. The lender or closing agent opens it as part of the home purchase or refinance process, and you fund it by sending money to the escrow holder before closing day.
In a real estate transaction, escrow serves one purpose: to protect both the buyer and the seller. The buyer's down payment and earnest money sit in escrow until the sale is final. The seller knows the money is there and committed. The buyer knows their money will not go to the seller until all the conditions of the sale are met—the inspection passes, the appraisal comes in, the title is clear. If the deal falls apart for a reason covered by the contract, the escrow holder returns the money to whoever is may have access to to it.
Escrow accounts are also used in mortgage servicing. After you close on a home, your lender may set up an escrow account to collect money for property taxes and homeowners insurance. You pay into this account each month as part of your mortgage payment, and the lender pays the bills from it when they are due. This is different from the escrow account used during the purchase itself.
Key Takeaways
- The lender, title company, or closing attorney opens the escrow account for you—you request it as part of the mortgage or purchase process, but you do not set it up yourself.
- You fund the account by sending your down payment and earnest money to the escrow holder before closing, usually by wire transfer or cashier's check.
- The escrow holder keeps the money separate from their own accounts and releases it only when the conditions of the sale are met or the closing is complete.
- Escrow accounts used in mortgage servicing collect your monthly contributions for property taxes and insurance, and the lender pays those bills on your behalf.
- The escrow holder is bound by the purchase contract and state law to hold the money safely and release it only to the correct party.
How the escrow process works during a home purchase
When you make an offer on a home, your real estate agent or attorney will tell you how much earnest money to include with the offer. This is typically 1 to 3 percent of the purchase price, though the amount varies by market and by what the seller expects. The earnest money shows the seller you are serious about buying. You do not send this money to the seller. Instead, you send it to the escrow holder—usually the title company or the real estate brokerage's escrow account.
The escrow holder deposits your earnest money into a separate account and holds it there. If your offer is accepted, the earnest money stays in escrow. If your offer is rejected or you withdraw it before acceptance, the escrow holder returns the money to you. If you are under contract and the deal falls through because of something in your control—you fail inspection and choose not to proceed, for example—the earnest money may go to the seller as compensation. The exact outcome depends on what the purchase contract says.
As closing approaches, you will be asked to wire or deliver your down payment to the escrow holder. The down payment is the larger amount—typically 10 to 20 percent of the purchase price for a conventional mortgage, though it can be less. The escrow holder now holds both the earnest money and the down payment. On closing day, after all conditions are met (inspection, appraisal, title search, final walkthrough), the escrow holder releases the funds. The down payment and earnest money go to the seller, and the lender's funds go to pay off any existing mortgage on the property and cover closing costs.
What information you need to provide to open escrow
You do not fill out an process to open an escrow account. Instead, the lender or title company will ask you for information as part of the mortgage and closing process. They will need your legal name, address, phone number, and email. They will also need the name and contact information of the seller, the property address, and the purchase price.
The escrow holder will ask you how you plan to fund the account—wire transfer, cashier's check, or certified check. Wire transfers are fastest and most common. If you wire funds, you will receive wire instructions from the escrow holder, including the bank name, routing number, account number, and reference information. Do not wire money until you have confirmed the wire instructions directly with the escrow holder by phone. Wire fraud is common in real estate transactions, and scammers sometimes intercept email to send fake wire instructions.
You will also need to provide proof of funds—a bank statement showing you have the down payment and closing costs available. This is usually a statement from the last 30 to 60 days. The lender uses this to confirm you can actually close and are not borrowing the down payment from somewhere else.
Timing: when money goes into escrow and when it comes out
Earnest money goes into escrow as soon as your offer is accepted. The escrow holder typically receives it within one to three business days of the offer being signed. The money sits there while inspections, appraisals, and title searches happen—usually 7 to 14 days, though this varies.
Your down payment is due at closing, which is typically 30 to 45 days after the offer is accepted. You will receive a Closing Disclosure from your lender at least three business days before closing. This document shows the exact amount due at closing, including the down payment, closing costs, and any prorated property taxes or insurance. The escrow holder will tell you the exact wire amount and important date. Money must arrive before closing day, and wire transfers typically take one business day to clear.
On closing day, after you sign all documents and the title company confirms the title is clear, the escrow holder releases the funds. The down payment and earnest money go to the seller's account. The lender's funds are used to pay off the old mortgage (if any), pay the title company, pay the real estate agents' commissions, and cover other closing costs. Any money left over goes to you as a credit at closing or is refunded to you after closing.
Escrow accounts in mortgage servicing after closing
After you close on your home, your lender may set up a second type of escrow account—a mortgage escrow account or impound account. This is different from the escrow account used during the purchase. This account collects money each month to pay your property taxes and homeowners insurance on your behalf.
When you get your mortgage, your lender will estimate your annual property taxes and homeowners insurance and divide that by 12. That amount is added to your monthly mortgage payment. For example, if your property taxes are $2,400 per year and insurance is $1,200 per year, your lender adds $300 per month to your payment. You send this money to your lender as part of your regular payment, and the lender deposits it into your escrow account.
When property taxes are due, the lender pays them from your escrow account. When your insurance premium is due, the lender pays that from the account too. You do not have to remember these dates or write separate checks. The lender handles it. Once a year, the lender reviews the account and adjusts your monthly payment if taxes or insurance have changed. If you paid too much into escrow, you may get a refund. If you did not pay enough, your monthly payment goes up.
Not all mortgages require an escrow account for taxes and insurance. If you put down 20 percent or more, you may be able to opt out and pay taxes and insurance yourself. If you put down less than 20 percent, most lenders require escrow. Some lenders allow you to switch out of escrow after you have paid down the loan to 80 percent of the original home value.
How escrow holders protect your money
Escrow holders are required by law to keep your money separate from their own operating accounts. The money sits in a trust account at a bank, and the escrow holder cannot use it for any other purpose. If the escrow holder goes out of business or is sued, your money is protected because it is not part of the company's assets.
Escrow holders are also required to follow the instructions in the purchase contract and the closing instructions from the lender. They cannot release money without written authorization from both the buyer and the seller, or from a court order if there is a dispute. If there is a disagreement about who should get the earnest money—for example, if the buyer and seller disagree about whether the deal fell through for a valid reason—the escrow holder can hold the money until a court decides or both parties agree in writing.
Escrow holders are licensed and regulated by state law. Title companies are regulated by state insurance departments. Real estate brokerages that hold escrow are regulated by state real estate commissions. Attorneys who hold escrow are regulated by state bar associations. If you have a problem with how an escrow holder handled your money, you can file a complaint with the appropriate state regulator.
Common mistakes to avoid with escrow
The most common mistake is wiring money to the wrong account. Scammers intercept emails from title companies and send fake wire instructions with slightly different account numbers. By the time you realize the mistake, the money is gone and very difficult to recover. Always call the escrow holder directly using the phone number from the original closing documents—not a number from an email—and confirm the wire instructions before sending any money.
Another mistake is not understanding what happens to earnest money if the deal falls through. Read your purchase contract carefully and know under what circumstances you get the earnest money back. If the inspection reveals major problems and you have an inspection contingency in the contract, you can usually get your earnest money back. If you straightforward change your mind without a valid reason in the contract, you may lose it.
A third mistake is not reviewing your escrow account statement after closing. Your lender will send you a statement each year showing how much you paid into escrow and how much was paid out for taxes and insurance. Check this against your property tax bill and insurance bill to make sure the amounts are correct. If your lender overpaid or underpaid, you can request an adjustment.
Frequently Asked Questions
Can I get my earnest money back if I back out of the deal?
It depends on why you are backing out and what your purchase contract says. If you have an inspection contingency and the inspection reveals problems you do not want to fix, you can usually get your earnest money back. If you straightforward change your mind without a valid reason in the contract, the earnest money typically goes to the seller. Read your contract before you sign it.
What happens if the escrow holder loses my money or goes out of business?
Escrow money is held in a separate trust account and is not part of the escrow holder's business assets. If the company goes out of business, your money is protected and will be returned to you or released according to the purchase contract. If money is actually lost due to fraud or theft, you may be able to recover it through the state regulator or through a lawsuit, though recovery is not may provide.
Do I earn interest on money sitting in escrow?
Earnest money and down payment money held in escrow during a purchase typically do not earn interest. The escrow holder holds the money in a non-interest-bearing account. Money held in a mortgage escrow account for taxes and insurance also does not earn interest in most states, though a few states require lenders to pay interest on escrow balances.
Can I choose not to use escrow for property taxes and insurance?
If you put down 20 percent or more on your home, many lenders allow you to opt out of escrow and pay taxes and insurance yourself. If you put down less than 20 percent, most lenders require escrow. After you have paid the loan down to 80 percent of the original home value, you can ask your lender to remove the escrow requirement.
How long does money stay in escrow during a home purchase?
Earnest money stays in escrow from the time your offer is accepted until closing, usually 30 to 45 days. Your down payment goes into escrow a few days before closing and is released on closing day. Once the sale is complete and all documents are signed, the escrow account for that transaction is closed.