What is the function of escrow in mortgage transactions?

In mortgage transactions, escrow serves a crucial role by holding funds until all contractual obligations are met. This process involves a neutral third party who ensures that all aspects of the transaction are completed before the funds are released. For example, in a home purchase, the buyer deposits their earnest money into an escrow account. The escrow agent then ensures that necessary conditions, such as a clear title and agreed repairs, are fulfilled before closing the sale. This protects both the buyer and the seller by making sure that no money changes hands until everyone meets their commitments under the contract.

This function of holding funds is essential because it fosters trust in the transaction, allowing the involved parties to complete the process without concern about the other party’s ability or willingness to fulfill their obligations. Once everything is duly satisfied, the funds are disbursed correctly to finalize the sale.