What Does It Mean When a House Is in Escrow?

Buying your first home can be exciting, but it can also feel overwhelming at times. There will be a lot happening that involves money you’ve saved and money you’re borrowing. You’ll hear your lender and real estate agent use the phrase “house in escrow.”

In this post, we explain the meaning of having a house in escrow and clarify the two types of escrow accounts: the one used during the homebuying process and the one used after you buy your home.

What does ‘in escrow’ mean in real estate?

When a house is “in escrow,” it means a neutral third party temporarily holds the funds and documents related to the transaction. This ensures that both the buyer and the seller fulfill their respective obligations before the sale is finalized. The escrow process protects both parties and helps facilitate a smooth transaction.

As a buyer, the two main purposes of escrow are to hold your earnest money and manage the funds related to the sale until all conditions of the escrow agreement are met. The escrow process typically takes 30-45 days to complete.

What’s happening while a home is in escrow?

During the escrow period, several key activities take place to ensure the home sale stays on track. Here’s what you can expect:

Title search: Verifying the property’s legal ownership and any existing liens or claims.
Home appraisal: Assessing the property’s market value to ensure it aligns with the purchase price.
Home inspections: Conduct a thorough inspection of the property to identify any issues that need addressing.
Required repairs: Making necessary fixes based on inspection results.
Buyer financing and insurance: Securing a mortgage and obtaining homeowner’s insurance.
Zoning research or property surveys: Ensuring the property complies with local zoning laws and accurately determining its boundaries.

What is an escrow account in real estate?

As noted above, while your home is in escrow, a third party will manage the documents and funds needed to complete the purchase. After the purchase, there will still be money that needs to be managed as part of your mortgage agreement and tax and insurance requirements.

To process both ends of your transaction, there are two main types of escrow accounts in real estate:

1. Escrow account while buying a home

During the homebuying process, an escrow account holds the buyer’s earnest money deposit, which is sometimes referred to as a good faith deposit. Funds for closing costs and other needs are also sometimes held in this account.

If the purchase agreement falls through and it’s determined to be the buyer’s fault, the seller usually keeps the money. If all goes well, the earnest money is typically applied to the buyer’s down payment.

Funds from this account are only released when all the conditions of the sale are met, such as inspections and appraisals we listed above. During the homebuying process, an escrow company or escrow agent is responsible for managing this escrow account

2. Escrow account after buying a home

Once you’ve purchased a home, most lenders will set up an escrow account to manage payments for property taxes and homeowners insurance. Each month, a portion of your mortgage payment is deposited into this account, and the lender uses these funds to pay your taxes and insurance premiums when they’re due.

This helps ensure that these critical expenses are paid on time, avoiding penalties or lapses in coverage. After you’ve closed on your home, your mortgage servicer typically continues to manage this escrow account.