What is an escrow account used for in real estate transactions?

An escrow account is established in real estate transactions primarily to hold funds until certain conditions of the transaction are met. This serves as a safeguard for both buyers and sellers, ensuring that the money involved in the transaction—such as the buyer's earnest money deposit or funds needed for closing—are securely held until all relevant contractual obligations are fulfilled. For example, this might include contingencies such as successful home inspections, completion of repairs, or final approvals for financing.

Once the transaction conditions are met, the funds held in the escrow account can be disbursed accordingly, such as to the seller or to pay closing costs. This process builds trust between the parties involved, knowing that the funds will be managed properly and released only when it is appropriate to do so. The escrow account thus plays a crucial role in the smooth progression of real estate transactions by creating a transparent and secure environment for handling financial exchanges.