During a real estate transaction, a neutral third party holds funds or important documents until all the conditions of the agreement have been met and the transaction is completed. An escrow is meant to protect the interest of both the buyer and the seller during the homebuying process.
A real estate sale involves transfer of title from the seller to the buyer. An escrow guarantees the seller that the buyer is serious about buying their property and has the funds to do so. At the same time, it protects the buyers against fraud in cases where the seller doesn't hold any claim to a title they are selling.
When a buyer makes an offer that is accepted by the seller, the buyer makes an ‘earnest deposit’ to show their seriousness to buy. An escrow account holds the buyer’s deposit until closing and it is rolled into the down payment once the deal is closed.
At closing, a title transfer occurs between the seller and the buyer.
There is another type of escrow account that homeowners can use to pay their mortgage insurance and property taxes. Your lender may ask you to use an escrow account to deposit money that they can pull out to pay for expenses on your behalf.