What does "escrow" mean in real estate financing?

In real estate financing, "escrow" refers to a process in which a neutral third party holds funds or documents on behalf of the parties involved in a transaction until specific conditions outlined in the escrow agreement are fulfilled. This arrangement helps protect both the buyer and seller during the transaction process.

The escrow company or agent ensures that all contractual obligations are met—such as inspections, financing approvals, and other contingencies—before the transaction is finalized. Once all conditions are satisfied, the escrow agent will facilitate the transfer of funds to the seller and the transfer of property ownership to the buyer, ensuring a smooth transaction process and reducing the risk of fraud or miscommunication.

This role is critical in real estate transactions, as it provides security and clarity for both parties involved, allowing them to perform due diligence without the fear of losing their funds or property rights. Consequently, the correct understanding of escrow reinforces the importance of having a trusted intermediary in real estate financing.