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The definition of “escrow account” depends on its use. For homebuying purposes, an escrow account generally refers to an account held by a neutral third party (such as a title company or escrow company) to keep the buyer’s earnest money deposit secure. The funds are kept until closing and applied to the buyer’s down payment, or until the home’s purchase contract cancels.
Escrow accounts may also hold documents and money for other expenses that are necessary for the home’s sale.
Once a borrower has a mortgage, a separate escrow account is used to service a mortgage and held by a mortgage’s servicer (the company you send your payment to). This account, also known as an impound account, holds money that is deposited from each payment the borrower makes. Funds are held until they pay for property taxes and insurances (hazard, flood, wind, or mortgage insurance).
Money in this escrow account generally cannot be used toward monthly mortgage payments, fees, or corporate advances. But escrow funds may be used to pay off an entire mortgage account balance.
Many times, escrow accounts are a required part of a loan agreement or loan modification within a loan’s documentation. When required, an escrow account will be set up at the loan closing, upon application of loan modification terms to the account, or shortly after.
Further reading
Let’s Talk Escrow: What Is Escrow Analysis?
See also earnest money deposit
