What is Escrow and How Does it Work?
Escrow is a fundamental part of most real estate transactions, acting as a safeguard for buyers, sellers, and lenders. It helps ensure that money or property doesn’t change hands until all agreed-upon conditions are met, creating a neutral space where everyone’s interests are protected.
While it may seem like just another step in the homebuying process, escrow plays a pivotal role in keeping things organized, secure, and on track.
In this blog, we’ll walk through what escrow means, how it functions during a home purchase, and answer some commonly asked questions to help you feel confident and informed.
Cadence 11 Floor Plan, Cadence Portfolio, Solterra Community, Lakewood, Colorado
What is Escrow?
“Escrow” refers to a neutral third party that temporarily holds money, documents, and other assets on behalf of two different parties while a transaction is being finalized.
In real estate, an escrow account is used to safely hold funds—like your earnest money deposit— until all home purchase conditions are met. Think of it as a secure “holding area” that ensures everyone involved in the transaction does what they’ve agreed to before exchanging any money or property.
Braydon Floor Plan, 50' Detached Collection, Heartland Community, Baxter, Ontario
How Does Escrow Work When Buying a Home?
Here’s a basic overview of how escrow typically works in a home purchase:
1. Offer Accepted
Once a buyer and seller agree on a purchase price and terms, the buyer usually deposits earnest money into an escrow account. Making this good faith deposit shows that the buyer is serious and committed to making the purchase.
2. Escrow Opens
An escrow officer or agent (usually through a title company or escrow firm) manages the process. They collect and hold funds and documents while ensuring both parties meet the agreed-upon conditions.
3. Due Diligence Period
During escrow, inspections, appraisals, and title searches take place. The buyer may also finalize their mortgage loan. The escrow agent may help coordinate these steps and ensure all paperwork is properly completed.
4. Contingencies Cleared
Once all contingencies (like home inspection or loan approval) are resolved, the transaction moves closer to closing.
5. Closing Day
The buyer signs loan documents and pays the remaining closing costs. Once everything is signed, sealed, and delivered, the escrow agent releases the funds to the seller, records the deed, and the buyer officially becomes the homeowner.
Residence 4 Floor Plan, Allora Neighborhood, Amoruso Ranch Community, Roseville, California
Common Questions About Escrow
Is escrow only used in real estate?
Nope! While escrow is most commonly associated with buying a home, it can also be used in other large financial transactions—like business deals or mergers—where trust and verification are essential.
How long does escrow take?
Escrow usually lasts between 30 and 60 days, depending on the terms of the sale and how quickly the buyer can complete financing and inspections. Any delays can extend the timeline.
What can delay escrow?
Common causes of delays include issues uncovered during the home inspection, appraisal values coming in lower than expected, financing holdups, or incomplete paperwork.
What’s the difference between an escrow account during a home purchase and an escrow account for taxes and insurance?
- During a home purchase, the escrow account holds earnest money and funds for closing.
- After buying a home, your lender may set up a mortgage escrow account or impound account to collect a portion of your property taxes and homeowners insurance each month as part of your mortgage payment. The lender then pays these bills on your behalf when they’re due.
Who pays for escrow services?
Payment can vary depending on your location and what’s negotiated in your purchase agreement. Sometimes the buyer pays, sometimes the seller, and in many cases, the cost is split between both parties.
Can I choose my own escrow company?
That depends. In some cases, the real estate agent, lender, or builder may recommend or require a specific escrow company. In many resale transactions, the buyer and seller can negotiate which company to use.
Is the Escrow Process the Same in Canada?
While the term “escrow” is commonly used in the United States, Canadian real estate transactions follow a similar concept but often use different terminology and systems.
In Canada, escrow is typically handled by a lawyer or notary, depending on the province. Here’s how the process generally differs:
Terminology: Canadians are less likely to use the word “escrow.” Instead, they might refer to “in trust” or rely on their lawyer or notary to hold funds and documents until closing.
Who Manages It: In the U.S., an independent escrow or title company usually manages the transaction. In Canada, the buyer and seller each hire their own legal representative, and those professionals handle the transaction, including holding funds and managing the exchange of title.
Closing Process: The closing process in Canada is typically shorter and more straightforward than in many parts of the U.S. Much of the coordination happens directly between the lawyers or notaries, who ensure all conditions are met before the sale is finalized.
While the mechanics differ, the purpose is the same: to protect both parties and ensure a fair, secure transaction.
Why Escrow Matters
Escrow plays a crucial role in protecting both buyers and sellers. It ensures that money isn’t exchanged until all conditions are met, documents are properly signed, and everyone has done their part. It’s a safeguard that keeps the transaction fair, transparent, and on track.
Picasso Floor Plan, Single Family Homes Collection, Swan Point Community, Issue, Maryland
Whether you’re buying your first home or your fifth, understanding how escrow works can give you more confidence and clarity throughout the process. While it may seem like just another step in the homebuying journey, escrow brings it all together—securely and smoothly.
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So why wait? Start your journey to homeownership today with Brookfield Residential! Explore where we build and connect with our sales team when you’re ready to learn more. We’ll be expecting you!
The information provided in this blog post is for informational purposes only and should not be considered investment, professional, or legal advice. Please consult a professional before making real estate decisions. Brookfield Residential is not responsible for any actions taken based on the information provided.
