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What is Escrow?

What is Escrow



Escrow is an agreement, normally drawn up between parties, whereby the principal parties exchange money or property in return for a promise from another party. Being in escrow is basically a legal contract in which the principal parties involved in the transaction share and receive money or property from a third party, usually the lender.

The common terms for the escrow are referred to as the ‘agreed terms’. The disbursement of this money is based on several conditions agreed upon by the principal parties involved in the transaction. For instance, there could be a provision in the contract where the lender has the right to demand payment in full if the condition is not met.

Escrow could also be a condition for the issuance of securities to investors. In the case of securities, the principal and his/her agent have to agree on the amount of the deposit and the duration before the securities will be issued.


Different Types of Escrow

There are different types of escrow. There could be a ‘judicial’ escrow, in which the money is used to settle a court order.  A judicial escrow would be set up to ensure the judgment debtor is paying the agreed amount to the judgment creditor, and that the funds are being disbursed to members of the settlement.  Class action lawsuits are a good example of a type of lawsuit that could result in the need for a judicial escrow.

Other than Judicial  

An ‘other than judicial’ escrow would involve the borrower, i.e. the investor, having an arrangement with the lender for the principal to deposit money or property at the time of the agreement, but then this money or property is given to the lender in the form of a ‘fee simple’ contract and is not subject to the same conditions.


The ‘judicial’ escrow will normally run until the date of the expiration of the escrow. On the other hand, the other than judicial escrow may run until certain conditions are met by both parties. These conditions may include the completion of the contract by both the principal and the investor.

Escrow could also come in the form of a ‘certificate of deposit‘, a form of borrowing agreement in which the borrower provides the money or property to the lender, and then the lender, in turn, lends it to another party to use. This may also be done as a secured borrowing in the form of a mortgage.

The above mentioned forms of escrow are the common forms of escrow in the US. While you cannot avoid having escrows it is important to know exactly what they entail and when they occur so that you can decide the best way to deal with the situation to avoid issues that arise.

As mentioned, there is a possibility that the terms of the escrow are that the loan will become ‘due’ at the specified date. If you do not pay the loan at the specified date, the escrow will become ‘void’. Knowing more about escrow is very important to real estate agents.


Escrow’s Purpose

What is escrow’s purpose? The purpose of escrow is to protect both the lender and the borrower, by ensuring that both parties can make regular payments to the other party in the case of an escrowed loan.

However, you do not have to pay any fees to the escrow. You can choose to pay a fee to the person who has drawn up the agreement. The escrow could be drawn up by yourself or by someone else.

The most important thing to remember is that escrow works on the principle that a lender must pay the principal a proportion of the total loan if the principal defaults, with the remaining money going to the escrow. In this way, both parties will benefit from the escrowed loan. Once the escrow is discharged, the remaining loan amount will revert to the lender.