Escrow Explained: How Money Moves Before Closing

What Is Escrow?

Escrow is a neutral third party — usually a title company or escrow company — that holds money and documents during the home buying process. Their job is to make sure nobody gets cheated.

The buyer deposits earnest money into escrow. The seller deposits the deed. The lender deposits the loan funds. The escrow company coordinates everything so that on closing day, everyone gets what they are owed.

Your Earnest Money Deposit

When your offer is accepted, you put earnest money into escrow — typically 1–3% of the purchase price. This money shows the seller you are serious.

The money stays in escrow until closing. If you walk away due to a contingency (inspection, financing, appraisal), you get it back. If you walk away without a contingency, the seller may get to keep it.

At closing, your earnest money applies to your down payment and closing costs. You are not "losing" that money — it is going toward your home purchase.

The Escrow Timeline

• Day 1–3: Escrow is opened. You wire your earnest money deposit. - Day 7–14: Inspection period. If you walk away, escrow returns your deposit. - Day 15–30: Appraisal period. Lender orders appraisal. - Day 20–40: Underwriting. Lender reviews your file. - Day 30–45: Closing. Escrow company disburses funds and records the deed.

Who Is Involved

• Escrow officer/closing agent: Runs the escrow. Coordinates documents, funds, and signing. - Title officer: Researches the title to ensure there are no liens or ownership disputes. - Real estate agents: Communicate between buyer, seller, and escrow. - Lender: Provides the loan funds and sets conditions for disbursement.

Title Search and Title Insurance

The escrow company orders a title search to check for: - Outstanding mortgages or liens - Property tax issues - Easements or restrictions - Ownership disputes or missing heirs

If the title is clear, you get title insurance. Your lender requires a lender's title policy. You should also buy an owner's title policy — it is a one-time cost (roughly $500–$1,500) that protects you if a title issue appears later.

Prorations: Taxes and Utilities

Escrow handles prorations — splitting costs fairly between buyer and seller based on closing date.

• Property taxes already paid by the seller: you reimburse them for the post-closing portion. - Utility bills: similar proration. - HOA fees: prorated for the month of closing.

These appear on your Closing Disclosure and are handled through escrow, not side payments.

Escrow Disbursement

On closing day, after you and the seller sign everything, the escrow company: 1. Sends loan funds to the seller's lender (to pay off their mortgage) 2. Pays real estate commissions 3. Pays title insurance premiums, recording fees, and escrow fees 4. Sends the remaining proceeds to the seller 5. Sends you the keys

Escrow Fees

Escrow fees typically range from $1,500–$3,000 total, split between buyer and seller (custom varies by region). Ask your agent who typically pays escrow fees in your local market.

The Bottom Line

Escrow is the neutral referee. It holds everyone accountable and ensures the transaction is clean. When you get that final statement showing all funds disbursed correctly — that is the sign that your deal is complete.