Escrow meaning: a safe middle ground for a deal

Escrow definition in plain words

Think of escrow as a trusted referee holding the prize. To define escrow precisely, three parts must be present:

1. Two parties who have made a deal, such as a buyer and a seller.
2. A neutral holder, called the escrow agent or escrow holder: often a title company, lawyer, bank or licensed escrow firm.
3. Conditions written down in advance. When they are satisfied, the agent releases the money or documents to the right person. If they fail, the agreement says what happens instead.

The holder owes duties to both sides and cannot simply follow one side's instructions, which is what makes the setup trustworthy.

How it works when buying a home

In the US especially, buying a house usually runs through escrow. A simple worked example:

• A buyer agrees to pay 300,000 dollars for a house and puts down a 6,000 dollar deposit (often called earnest money). The deposit goes to the escrow agent, not the seller.
• During the escrow period, perhaps 30 to 45 days, the buyer gets an inspection and loan approval, and the title is checked for problems such as a lien.
• When every condition is met, the agent collects the rest of the money from the buyer and lender, pays the seller, records the deed and hands over the keys. This moment is called closing or the close of escrow.

If the inspection reveals a serious problem and the contract allows the buyer to walk away, the deposit may go back to the buyer instead.

Mortgage escrow accounts

The word has a second everyday use. Many lenders add an escrow account to a mortgage. Part of each monthly payment goes into it, and the lender uses that pot to pay property tax and home insurance when the bills come due.

This protects the lender's collateral, the house, from unpaid tax or an uninsured fire.

Other places you meet escrow

• Online sales: a service holds a buyer's payment for a car or domain name until the item arrives as described.
• Business deals: in a company purchase, part of the payment may sit in escrow for a period to cover any hidden problems found after the sale.
• Software: source code escrow lets a customer get the code if the software supplier goes out of business.
• India: escrow accounts are common in property projects, mergers, and public offers of shares, where banks act as the neutral holder.

Escrow meaning in sentences

• Our deposit stays in escrow until the seller fixes the leaking roof.
• The freelancer asked the client to escrow the full fee before work began.
• Close of escrow is set for the last Friday of the month.
• My mortgage payment went up because the escrow account was short after the tax increase.

A scroll behind the word

English picked up escrow in the closing decades of the sixteenth century, borrowing it from Anglo-French escrowe, from Old French escroue, meaning a scroll or strip of parchment. It is related to the English word scroll. At first it meant a written deed handed to a third person, to take effect only when a condition was fulfilled. The sense later widened to include money and other property.

Escrow compared with similar arrangements

More money words are in business and finance terms.