What is the definition of an escrow account?

The definition of an escrow account is best captured by stating that it is a financial account where funds are held until certain conditions are met. This is particularly relevant in real estate transactions, where an escrow account often facilitates the secure handling of funds during the buying and selling process.

When a buyer and seller enter into a contract, the buyer may deposit earnest money into the escrow account as a sign of good faith. This money is then held by neutral third parties—usually a title company or an escrow agent—until all contractual obligations have been fulfilled, such as the completion of inspections or the securing of financing. Once these conditions are satisfied, the funds in the escrow account are disbursed appropriately, typically going toward the purchase price of the property.

This mechanism serves to protect both parties in a transaction, ensuring that no money is transferred until all agreed-upon conditions are met, thus providing a safeguard against potential disputes or failures in the agreement.