Understanding Escrow: The Essential Guide for 2026

Escrow is a financial arrangement where a neutral third party holds money or assets until both sides of a transaction meet their agreed-upon conditions. In real estate, it protects buyers and sellers by keeping funds secure until everyone fulfills their obligations.

This guide covers how escrow works during a home purchase, what happens after you close on a mortgage, and who manages your escrow account at each stage.

What is escrow

Escrow is a financial arrangement where a neutral third party holds money or documents on behalf of two people in a transaction. The third party only releases the funds when both sides meet the conditions they agreed to. In real estate, escrow protects buyers and sellers by keeping earnest money deposits safe and ensuring no one walks away with cash before the deal is done.

Think of it like a referee holding the ball until both teams are ready to play. The escrow agent doesn't take sides. Instead, they follow the rules laid out in the purchase agreement and release funds only when everyone has done their part.

What is an escrow account

An escrow account is simply the account where the money sits. In real estate, you'll encounter two types: one used during the home purchase, and another used after you close on your mortgage.

Escrow accounts for home buying

When you make an offer on a home, you typically put down an earnest money deposit to show the seller you're serious. Rather than handing that money directly to the seller, it goes into an escrow account managed by a neutral party like a title company or attorney.

The deposit stays there until closing. If the sale goes through, your earnest money gets applied toward your down payment. If the deal falls apart because of a failed inspection or financing issue covered in your contract, you can usually get your deposit back.

Escrow accounts for mortgages

After you close on your home, your lender may set up a separate escrow account to handle property taxes and homeowners' insurance. Each month, a portion of your mortgage payment goes into this account. When your tax bill or insurance premium comes due, your lender pays it on your behalf.

This setup protects the lender's investment. They want to make sure taxes stay current, and insurance coverage doesn't lapse on the property securing your loan.

What is escrow in a mortgage

Your monthly mortgage payment often includes more than just principal and interest. The escrow portion covers recurring expenses that protect both you and your lender.

Here's what escrow in a mortgage typically pays for:

• Property taxes: Collected monthly, then paid to your local tax authority when due

• Homeowners insurance: Keeps your coverage active without you tracking renewal dates

• Private mortgage insurance (PMI): Required if your down payment was less than 20%

Your lender estimates your annual tax and insurance costs, then divides that total by 12. That amount gets added to your monthly payment and deposited into your escrow account.

How escrow works when buying or selling a home

The escrow process follows a clear sequence from the moment your offer is accepted until you get the keys, typically taking 41 days for financed purchases. Each step builds on the last.

1. Opening escrow

Once you and the seller sign a purchase agreement, escrow officially opens. A neutral escrow agent is selected to manage the process. This agent works for both parties and makes sure everyone meets their obligations before any money changes hands.

2. Depositing earnest money

Within a few days of signing, you'll deposit your earnest money into the escrow account. The amount varies, but it's typically 1% to 3% of the purchase price. The seller knows the funds are verified and secure, but they can't touch the money until all conditions are satisfied.

3. Completing contingencies and inspections

During this phase, the escrow agent tracks whether both parties are meeting the terms of the contract. You might be waiting on a home inspection, an appraisal, or final mortgage approval. The seller might be clearing the title or completing agreed-upon repairs.

If a contingency isn't met and your contract allows for it, you can typically walk away with your earnest money intact.

4. Closing escrow

Once all conditions are satisfied, the escrow agent coordinates the final steps. Funds are released to the seller, and you receive the property title. At that point, the transaction is complete, and you officially own the home.

What does it mean to be in escrow

When someone says a home is "in escrow," they're referring to the period between an accepted offer and closing. During this window, the escrow agent holds all funds and documents while both parties work through their obligations.

Being in escrow typically lasts 30 to 60 days, though timelines vary based on financing, inspections, and local customs. It's an active period with multiple milestones happening behind the scenes.

Who manages your escrow account

Different parties handle escrow depending on where you are in the process. Knowing who's responsible can help you direct questions to the right place.

Escrow companies and escrow agents

During a home purchase, an escrow company or agent manages the transaction. This is often the same entity handling your title work. They hold your earnest money, manage documents, and coordinate between all parties involved in the sale.

Because the escrow company serves both buyer and seller, the fee for their services is usually split between the two parties.

Mortgage servicers

After closing, your mortgage servicer takes over the ongoing escrow account for taxes and insurance. They collect funds monthly as part of your mortgage payment and pay your bills when due.

Your servicer analyzes your escrow account once a year to make sure it's collecting the right amount. If they've collected too much, you'll receive a refund. If there's a shortage, you'll have options to make up the difference.

What is an escrow payment

Your escrow payment is the portion of your monthly mortgage payment that goes toward property taxes and insurance. It's separate from the principal and interest you're paying on the loan itself.

Lenders estimate your annual expenses and divide by 12 to calculate your monthly escrow payment. Most lenders also require a cushion, typically two months' worth of payments, to protect against unexpected increases in taxes or insurance premiums.

Benefits of using an escrow account

Escrow offers advantages for everyone involved in a real estate transaction. The protections work differently depending on which side of the deal you're on.

For home buyers

Escrow protects your earnest money if a deal falls through. Since a neutral third party holds the funds, you can be confident your deposit will be returned according to your contract terms.

For home sellers

Sellers gain assurance that the buyer is serious and financially capable. The verified earnest money deposit signals commitment, and funds are released only when all terms are fulfilled.

For mortgage lenders

Lenders use escrow to ensure property taxes and insurance stay current. Unpaid taxes could result in liens on the property, and lapsed insurance could leave the home unprotected.

Drawbacks of escrow accounts for homeowners

While escrow offers convenience, there are trade-offs worth knowing about:

• Higher monthly payments: Your mortgage payment includes the escrow amount, making it larger than principal and interest alone

• Escrow shortages: If taxes or insurance increase, you may owe additional funds to cover the gap

• Less control: You can't manage payments yourself or earn interest on the funds

Your servicer recalculates escrow annually. If your property taxes rise significantly after a home purchase, your monthly payment will increase to cover the difference. 68% of homeowners have experienced payment increases over the past two years due to rising taxes and insurance.

House escrow and ongoing costs

After you own your home, escrow continues to manage certain recurring expenses. However, not everything falls under this umbrella.

You'll handle HOA dues, utility bills, and maintenance costs separately. Supplemental tax bills, which sometimes arise after a property changes hands, also fall outside your regular escrow account.

Do you need an escrow account

Many lenders require escrow accounts, especially for certain loan types. FHA loans require all borrowers to maintain escrow for the life of the loan. VA loans may allow you to opt out with 10% down and a strong credit profile. Conventional loans typically require escrow unless you put down 20% or more.

Even when escrow is optional, many homeowners choose to keep it. The convenience of bundled payments often outweighs the desire for more control.

Can you remove escrow from your mortgage

In some cases, yes. However, you'll typically need to meet certain criteria: a loan-to-value ratio of 80% or less, a positive escrow balance, and proof of current homeowners' insurance.

If you remove escrow, you become responsible for paying property taxes and insurance directly. That means tracking due dates and budgeting for large lump-sum payments. Some lenders also charge a fee for opting out.

How to make escrow simple and stress-free

Working with a company that streamlines the entire process, including title and escrow, can reduce stress significantly. When Opendoor acquired OS National in 2019, the goal was exactly this: making title and escrow more transparent and straightforward for customers.

Whether you're buying or selling, having clear visibility into every step of the transaction helps you move forward with confidence. No surprises, no confusion.

Ready to explore your options? Get a cash offer and see how simple selling can be.

Frequently asked questions about escrow

How long does the escrow process take when buying a home?

Escrow typically lasts 30 to 60 days, though timelines vary based on financing, inspections, and how quickly both parties complete their obligations. Cash transactions often close in 7 to 10 days compared to financed purchases.

Do you get your escrow money back after closing?

If the sale closes successfully, your earnest money is applied toward your purchase, usually as part of your down payment. If the deal falls through due to a contingency in your contract, you may receive your deposit back.

Who owns the money held in an escrow account?

The funds belong to the depositing party until conditions are met. Once all terms are satisfied, the escrow agent releases the money according to the agreement.

What happens if a home sale falls through during escrow?

It depends on why the deal failed. If contingencies weren't met, like a failed inspection or denied financing, the buyer typically receives their earnest money back. If the buyer defaults without a valid reason, the seller may be entitled to keep the deposit.

What is the difference between escrow and a down payment?

Escrow holds your earnest money temporarily during the transaction. Your down payment is the larger amount you pay toward the home's purchase price at closing. Earnest money often gets applied to your down payment when the sale closes.

Who chooses the escrow company in a real estate transaction?

The buyer and seller typically negotiate this, though local customs and contract terms often influence the decision. In some markets, the seller traditionally selects the escrow company; in others, the buyer does.

What happens to extra money left in an escrow account?

If there's a surplus after your taxes and insurance are paid, your lender refunds the overage to you. Federal regulations require lenders to return excess funds within a specific timeframe.