What does "escrow" mean in real estate transactions?

In real estate transactions, "escrow" refers to a financial arrangement where funds are held by a third party until certain conditions or obligations within a transaction are met. This typically occurs during the home buying process when the buyer submits funds, such as earnest money, to an escrow account to show their commitment to purchasing the property. The funds are not released to the seller until all terms of the sale are fulfilled, such as inspections being completed and financing being secured.

The escrow agent, who is often a title company or an attorney, ensures that both the buyer and seller adhere to the agreed terms before the transaction is finalized. By using escrow, both parties are protected: the seller knows that the buyer has the necessary funds, and the buyer knows that the seller cannot access the funds until they meet the obligations stipulated in the transaction. This process helps to prevent fraud and ensures a smooth transfer of ownership.