Transaction Management
What Is Escrow? A Real Estate Exam Guide
Escrow is a neutral holding arrangement that protects both buyer and seller during a real estate transaction. Here's what the exam tests about escrow accounts, instructions, impound accounts, and closing.
What Is Escrow?
Escrow is a legal arrangement in which a neutral third party (the escrow holder or escrow agent) holds money, documents, and instructions until specific conditions are met. In real estate, escrow is opened when a purchase contract is signed and closes when title transfers to the buyer.
The escrow holder does not represent the buyer or seller — they are a neutral party. The term 'in escrow' means the property is under contract and the sale is pending.
Types of Escrow in Real Estate
Transaction Escrow
Opened for a specific purchase and sale. Holds the earnest money deposit, loan funds, title documents, and closing instructions. Closes when the sale completes.
Impound Account
Held by the lender after closing. Collects monthly payments for property taxes and homeowners insurance, then pays these bills when due. Also called a 'mortgage escrow.'
Escrow Instructions
Written instructions from buyer and seller to the escrow holder specifying the conditions that must be met before closing. Both parties must sign.
Escrow Closing
When all conditions are met — inspections cleared, loan funded, title clear — the escrow holder disburses funds, records the deed, and the transaction is complete.
Escrow FAQ for the Exam
Who can serve as an escrow holder?
Depending on state law, an escrow holder may be a licensed escrow company, title company, attorney, or in some states, a real estate broker. The escrow holder must be neutral.
What is an impound account and who requires it?
An impound account is maintained by the mortgage lender to collect monthly payments for property taxes and homeowners insurance. Lenders typically require impound accounts when the down payment is less than 20% (LTV > 80%).
What happens to earnest money if the deal falls through?
If the buyer cancels for a contingency-protected reason, earnest money is typically refunded. If the buyer defaults without a valid contingency, the seller may keep the earnest money as liquidated damages.
What does 'in escrow' mean on a real estate listing?
A property 'in escrow' or 'pending' is under a signed purchase agreement and the escrow has been opened. The sale is not yet final.
Related Resources
Definition Page Pillars
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