What is Escrow and Why Does it Matter?

What Is Escrow and Why Does It Matter?

“Escrow” confuses most first-time buyers. Here’s a simple breakdown of what it is, how it works, and why it matters during a home purchase.

If you’re buying your first home, chances are someone has mentioned the word “escrow” and your brain quietly shuts down. You’re not alone. Escrow is one of the most misunderstood (but important) parts of the home buying process and if you don’t know how it works then you risk delays, confusion, and even losing your deposit.

Let’s break it down in plain English:

What Is Escrow?

Escrow is a neutral third party whom holds all the money and documentation while the buyer and seller complete the terms of a real estate contract.

Think of it as a safety box that protects both sides:

• • The buyer’s money (like earnest money deposit and loan funds)
  • The seller’s deed (proof of ownership)
  • The lender’s paperwork

It’s important to note that no one gets paid and no property changes hands until all conditions are met. If there are any issues during the process, than escrow will essentially hold all the money until the issues are resolved.

What Happens During Escrow?

Real estate agents and people in the industry tend to use the term “Escrow” seamlessly in different forms which may cause confusion. As real estate agents, we typically refer to being in “Escrow” as the same as being in contract with a home. Escrow is also a third party entity as well. Here we will break down what being in “Escrow” means for a real estate process standpoint:

Here’s a simplified version of what typically happens:

1. 1. Offer Accepted → Escrow is opened
   2. Earnest Money Deposit is placed into escrow
   3. Disclosures & Inspections are completed
   4. Appraisal & Loan Approval by the lender
   5. Title Search to confirm no legal issues
   6. Final Walkthrough
   7. Closing Documents Signed
   8. Funds Released & Keys Deliverey

Each step needs to be completed for the sale to move forward. Escrow keeps everything on track and makes sure everyone is on task.

Who Is Involved in Escrow?

• • Escrow Officer: Manages timelines, coordinates documents and money
  • Buyer + Agent: Complete due diligence, inspections, obtain financing
  • Seller + Agent: Handle repairs (if needed), paperwork, disclosures
  • Lender: Approves financing and releases loan funds
  • Title Company: Ensures clean ownership and no legal claims on the property title (In most cases, the escrow company and title company are usually the same entity)

Common Escrow Delays (and How to Avoid Them)

Viewing properties and finding the perfect home is only just the beginning. Being in contract and going through the escrow process is the real hurdle in buying a home.

Escrow isn’t always smooth. Here are some common hiccups:

Low Appraisal – This happens a lot when the market is hot and competition is high. Which is why in a previous post HERE, we mentioned its better to buy when there’s high rates and lower competition vs lower rates and higher competition. When the market is competitive, and buyers are up against 10+ offers than buyers will have to overbid to win the home. When the overall market is like this, than buyers have little choice but to overbid. Make sure you review the recent sales data points with your agents to make a decision on overbidding and understand that your appraisal may come in lower.

Financing Delays – Many times, we’ve seen buyers not get fully pre-approved. Instead they just go online and get a pre-qualification letter from a random bank. What tends to happen is, these pre-qualification letters aren’t accurate and it may not reflect a true pre-approval. Since pre-qualification letters aren’t accurate, buyers will sometimes discover their financing or lending options might be short of what they need to actually purchase the home they want.

Repair Disputes – Before offering on a home, make sure you review the inspection report thoroughly with your agent. Understand the issues of the home and what you’re getting yourself into. Address issues early with your agent and the seller and not at the end.

Missing Documents – Many times once we’re in contract on a home, many agents and buyers take their foot off the gas. During the escrow process, you’ll be working closely with escrow and your lender to get your loan approved. There will be a lot of documentation needed by the lender and everyday you delay on providing documentation can potentially delay the closing process further.

Title Problems – Title companies are crucial in buying a home. You want to make sure the home you’re buying is free and clear of any title issues. Meaning, once you close on the home, no one could dispute your ownership of the home.

Why Escrow Matters for You

For first-time buyers, escrow is more than paperwork. It’s where the biggest part of the deal happens:

• • Your deposit is protected
  • You get time for due diligence
  • The lender, seller, and agent are all held accountable to deadlines

Without escrow and/or a third party entity, than buying a home would be chaotic.

Quick Buyer Checklist for Escrow

Here is a quick buyer checklist for your escrow process. Most real estate agents will be largely hands off once you get your offer accepted and provide poor communication to homebuyers as they wait for their commission to process. Make sure you have these main points covered:

• • Know your deposit amount and when it’s due
  • Complete inspections early
  • Stay responsive to your lender and escrow officer
  • Review your Closing Disclosure (CD) before signing
  • Don’t open new credit cards or change jobs mid-escrow
  • Keep your agent looped in at every step

Want a Full Timeline?

This post breaks down one piece of the journey. But if you want a month-by-month roadmap from pre-approval to move-in, my Substack newsletter has you covered.

Read the full First-Time Buyer Timeline (Substack)