What Does “In Escrow” Mean?

If you’ve never bought a home before, you may hear someone say:

“The house is in escrow.”

Or:

“We’re in escrow.”

Maybe you’ve heard it from a friend.

Maybe you’re buying a home in another state.

Or maybe you’ve simply heard the term on TV or in a movie and wondered what it actually means.

If you’re primarily familiar with buying real estate in Illinois, you may not hear the phrase used quite as often in everyday conversation.

But if you’re buying in Florida, Tennessee, California, Arizona, Nevada, Texas, or many other parts of the country, “escrow” is a term you may encounter.

The exact process and terminology can vary by state and by transaction, so let’s make it simple.

So…What Does “In Escrow” Actually Mean?

In a real estate transaction, escrow generally refers to a situation where a neutral third party holds money, documents or other items connected with the transaction until the conditions of the agreement have been satisfied.

The basic idea is pretty simple:

The buyer and seller have agreed to a deal, but the transaction isn’t finished yet.

The third party helps hold and manage the appropriate funds or documents while everyone completes the required steps.

Why Do You Hear the Term More in Some States?

Real estate closing practices are not identical across the United States.

In some areas—particularly many Western states—you’ll commonly hear people refer to the transaction as being “in escrow” and may even hear the closing referred to as “close of escrow.”

Other states may use terms such as:

• Closing
• Settlement
• Closing agent
• Settlement agent
• Title company
• Closing attorney
• Escrow agent

And sometimes you’ll hear several of these terms used during the same transaction.

That’s why I don’t want you assuming that every state handles the process exactly the same way.

What About Illinois?

If you’re buying in Illinois, you may be more accustomed to hearing about the attorney, title and closing process rather than constantly hearing someone say, “We’re in escrow.”

That doesn’t mean escrow concepts don’t exist.

It means the terminology and the way the transaction is handled can be different.

And that’s something you’re going to see throughout this Buyer Hub:

Real estate is local.

The process in Illinois may not look exactly like the process in Florida.

And Florida may not look exactly like Tennessee.

What Happens While You’re “In Escrow”?

This is generally the period between having a signed purchase agreement and getting to the closing.

A LOT can happen during this time.

Depending on the transaction, you may be working through:

• Home inspection
• Appraisal
• Financing
• Title search
• Title insurance
• Homeowners insurance
• Required disclosures
• Contract deadlines
• Loan conditions
• Repairs or negotiations
• Final walkthrough
• Closing documents

The exact sequence depends on the transaction and state.

But this is the important part:

Signing the contract does not mean you’re finished.

There’s still work to do.

What Happens to the Earnest Money?

This is one place where you’ll often hear escrow discussed.

Earnest money is typically deposited into an escrow account or otherwise held according to the contract and applicable law.

The money is generally held until closing or until the contract provides for another disposition of the funds.

Depending on the circumstances and the terms of your contract, the money may ultimately be applied toward your purchase or returned if the transaction is terminated under an applicable contractual provision.

And this is why you should understand your contract.

Don’t assume your earnest money is automatically refundable just because a deal doesn’t close.

The reason the transaction ends and the specific terms of the contract matter.

Is Escrow the Same Thing as Your Mortgage Escrow Account?

No.

This confuses a LOT of people.

You can hear the word escrow in two completely different situations.

Real Estate Transaction Escrow

This can involve money or documents being held during the purchase process while the transaction moves toward closing.

Mortgage Escrow Account

After you buy the home, your mortgage company may establish an escrow account to collect money for expenses such as property taxes and homeowners insurance.

Your lender then uses those funds to pay those bills when they come due.

Same word. Different purpose.

What Does “We’re in Escrow” Mean for You?

Usually, it means:

“We’ve signed a contract, and now we’re working through the steps necessary to get this transaction closed.”

It does not mean:

“Congratulations, you’re officially the owner!”

Not yet.

There are still deadlines.

There are still things that need to be completed.

And there are still circumstances that can affect whether the transaction makes it to closing.

This Is Why Your Timeline Matters

Once you’re under contract, I want you to pay attention to your deadlines.

Inspection deadlines.

Financing deadlines.

Appraisal.

Insurance.

Document requests.

Loan conditions.

Closing date.

Final walkthrough.

Missing a deadline can create problems.

Don’t assume someone else is going to remember everything for you.

I’ll help you understand what’s happening and what’s next, but I also want you to stay engaged in your own transaction.

One More Thing About Buying in Different States

If you’re buying a home in Illinois, Florida, Tennessee or somewhere else, don’t assume the process will be identical.

The people handling the closing may be different.

The terminology may be different.

The contracts may be different.

The timelines may be different.

The role of an attorney, title company, escrow company or settlement agent may be different.

That’s normal.

It doesn’t mean one process is right and another is wrong.

It means real estate is local.

And that’s one of the reasons having a knowledgeable local team matters.

The Bottom Line

If you hear:

“We’re in escrow.”

Don’t panic.

It generally means you’re in the period where the transaction is being completed and the appropriate money, documents and requirements are being handled before the closing can take place.

And if someone uses a term you don’t understand?

Ask.

Seriously.

There are no stupid questions when you’re dealing with one of the largest financial transactions of your life.

If you don’t understand what someone just told you, stop and ask.

That’s what this Buyer Hub is here for.

Have a Question?

Buying a home comes with a lot of questions. You don’t have to figure everything out on your own.

Have a question about something you read here? Want to talk through your situation? Or just not sure what your next step should be?

I’m happy to help.

Schedule a Time to Talk With Karyn

No pressure. No obligation. Just straight answers.

Prefer to just send me a question?