If you are buying or selling a home, you will hear the word “escrow” used frequently — and it will not always seem to mean the same thing. That is because, in real estate, escrow refers to two distinct arrangements that serve different purposes. One relates to the transaction itself. The other relates to your mortgage after closing.
This guide explains both, clearly and in the order you are likely to encounter them.
What escrow means during a real estate transaction
During a home purchase, escrow is a legal arrangement in which a neutral third party — called an escrow company or escrow officer — holds funds and documents on behalf of the buyer and seller until all of the conditions of the purchase contract have been met.
The purpose of this arrangement is straightforward. A home sale involves a buyer agreeing to pay a large sum of money and a seller agreeing to transfer ownership of a property. Neither party hands over their money or their deed on the first day. Instead, both parties fulfill the conditions of the contract over a period of weeks, and the escrow company manages the funds and documents in the meantime. When all conditions are satisfied, the escrow company releases the money to the seller and records the deed in the buyer’s name.
This protects both parties. The buyer knows their funds are held securely and will only be released when the seller completes their obligations under the contract. The seller knows the buyer’s money is committed and available.
Arizona is an escrow state
Real estate transactions are handled differently depending on the state. In some states, a real estate attorney manages the closing process. In Arizona, closings are handled by escrow companies, which are typically the escrow division of a title company. Arizona law does not require an attorney to be present at a residential closing.
The escrow company in an Arizona transaction is a neutral party. It does not represent the buyer or the seller. Its role is to follow the written instructions in the purchase contract and ensure that all conditions are met before funds and ownership change hands.
What the escrow company does during a transaction
Once a purchase contract is signed by both parties, the escrow company opens a file and begins its work. Its responsibilities throughout the transaction include the following.
The escrow company receives and holds the buyer’s earnest money deposit in a trust account. The earnest money is not accessible to either the buyer or seller while it is held in escrow — it is released only according to the terms of the contract. For more on how earnest money works and when it is refundable, see our guide: What is earnest money?
The escrow company orders a title search on the property. A title search is a review of the property’s public ownership records to confirm that the seller has a clear legal right to transfer ownership and that there are no outstanding liens, unpaid taxes, judgments, or other claims against the property. If the title search reveals an issue, it must be resolved before the transaction can close.
The escrow company coordinates the collection of all documents required to complete the closing, including the buyer’s loan documents if the purchase is financed, the signed deed, and any other paperwork required by the contract.
The escrow company prepares a closing statement — sometimes called a settlement statement — that itemizes every dollar coming in and going out of the transaction. This includes the purchase price, the buyer’s loan proceeds, the earnest money deposit, closing costs owed by each party, any prorated property taxes or HOA fees, and the net proceeds the seller will receive.
At closing, once all documents are signed and all funds are confirmed received, the escrow company pays off any existing mortgage on the property, distributes the remaining proceeds to the seller, pays any other parties owed funds as reflected in the closing statement, and submits the deed to the county recorder’s office for recording.
Recording is the process by which the transfer of ownership is entered into the public record. Once the deed is recorded, the buyer is the legal owner of the property.
Who selects the escrow company
In Arizona, the purchase contract specifies which title and escrow company will handle the transaction. Either the buyer or seller may propose a company as part of their offer or counteroffer, and the selection is a negotiable term like any other in the contract. Under the federal Real Estate Settlement Procedures Act (RESPA), a seller cannot require the buyer to use a specific title company as a condition of the sale. In practice, if the parties cannot agree on a company, it becomes a negotiating point to be resolved before the contract is finalized.
Who pays for escrow services
Escrow fees are charged for the services the escrow company provides throughout the transaction. In Arizona, it is common for escrow fees to be split between the buyer and seller, though the specific allocation is negotiable and will be reflected in the closing statement. The full breakdown of closing costs — including escrow fees — is covered in our guide: What are closing costs, and who pays them?
The second type of escrow: mortgage escrow accounts
Once a home purchase closes and the buyer has a mortgage, they may encounter the word “escrow” in a different context — this time referring to an account their lender manages on an ongoing basis.
A mortgage escrow account, sometimes called an impound account, is an account that the lender uses to collect and pay certain homeownership expenses on the borrower’s behalf. These expenses typically include property taxes and homeowners insurance premiums.
Here is how it works. Instead of the homeowner paying their property tax bill and insurance premium directly, the lender collects a portion of those costs each month as part of the regular mortgage payment. The lender holds those funds in the escrow account and pays the tax and insurance bills directly when they come due.
Lenders use mortgage escrow accounts to ensure that property taxes and insurance are paid on time, which protects the lender’s interest in the property. In many cases, lenders require borrowers to maintain a mortgage escrow account as a condition of the loan.
The difference between the two types of escrow
The transaction escrow account is temporary. It is opened when the purchase contract is signed, it holds the buyer’s deposit and eventually all closing funds, and it is closed once the transaction is complete.
The mortgage escrow account is ongoing. It is opened at closing as part of the loan arrangement and remains active for as long as the homeowner carries that mortgage, collecting funds each month and paying taxes and insurance as they come due.
Both are called escrow because both involve a neutral party holding funds on behalf of someone else until a specific obligation is met. The obligations are simply different in each case.
Frequently asked questions
What does it mean when a home is “in escrow”? When a home is in escrow, it means the buyer and seller have signed a purchase contract and the transaction is underway but has not yet closed. The escrow company has opened a file and is managing the process. The property is typically not available to other buyers during this period.
Can escrow funds be released early? Escrow funds are released according to the terms of the written purchase contract. They are not released early without written authorization from all parties involved. If the transaction is cancelled, the contract terms govern whether the earnest money is returned to the buyer or forfeited to the seller.
Does Arizona require a real estate attorney to close a transaction? No. Arizona does not require a real estate attorney to be present at a residential closing. Escrow companies handle the closing process in Arizona, including holding funds, preparing closing documents, and recording the deed.
What is the difference between a title company and an escrow company in Arizona? In Arizona, the title company and the escrow company are often the same organization or operate as divisions of the same company. The title function involves researching the property’s ownership history and issuing title insurance. The escrow function involves holding funds and documents and coordinating the closing. Many Arizona title companies perform both functions.
Qilo is a flat-fee real estate marketplace for buyers and sellers in Arizona. Buyers and sellers on the platform receive legally compliant transaction documents, listing tools, and step-by-step guidance through every stage of the process described above.
Related reading: What Actually Happens When You Sell a Home, From Start to Finish and What Actually Happens When You Buy a Home, From Start to Finish.