Two completely different accounts, same word
The single most confusing part of US homebuying is that "escrow" means two different things in two different phases of ownership, and people use the word interchangeably without flagging which one. They are governed by different rules, sit at different institutions, and serve different purposes.
| Transactional escrow | Impound escrow | |
|---|---|---|
| Phase | During the sale | During ownership |
| Who holds it | Title / escrow company or attorney | Mortgage servicer |
| What's in it | Earnest money, deed, contract docs, sale funds | Monthly tax + insurance reserves |
| Duration | 30–60 days (closing window) | Life of the loan |
| Governed by | State escrow law + RESPA | RESPA Section 10 (federal) |
| Required? | Customary, contract-driven | Lender-driven (often required) |
| Released when | Closing completes or contract terminates | Annually, when bills come due |
Treat them as unrelated. They share a word and nothing else.
Transactional escrow (the closing kind)
When you go under contract, the buyer typically wires the earnest money deposit (1–3% of purchase price; see also our first-time homebuyer offer strategy for how to size it) to a neutral third party. That third party is the escrow holder.
Who plays this role varies by region:
- Western US (CA, AZ, NV, WA) — independent escrow companies or title companies.
- Eastern US (NY, NJ, MA, CT, etc.) — real estate attorneys.
- Southern US (FL, GA, TX) — title companies, often the same one issuing title insurance.
- Midwest — mixed, often title companies.
The escrow holder's job is to hold the funds and documents, then release them when contract conditions are met. They never take sides. If the deal closes, the funds go to the seller and the deed goes to the buyer. If the deal terminates with the buyer in default, the funds may be released to the seller; if the deal terminates with a contingency exercised (financing, inspection, appraisal), the funds return to the buyer.
The escrow agent does not adjudicate disputes. If buyer and seller disagree on who gets the earnest money, the agent holds the funds (or interpleads them with the court) until both sides sign a release or a court orders a payout.
Impound escrow (the monthly kind)
After closing, your mortgage servicer typically sets up an impound account — sometimes called a "T&I escrow" because it holds taxes and insurance.
How it works:
- Each month, your mortgage payment includes principal, interest, plus 1/12 of the annual property tax, plus 1/12 of homeowners insurance, plus 1/12 of PMI if applicable.
- The servicer deposits the T&I portion into the impound account.
- When the property tax bill or insurance renewal is due, the servicer pays it directly out of the impound.
- Once a year, the servicer performs an escrow analysis and adjusts the monthly contribution if taxes or insurance went up.
The federal rule is RESPA Section 10: the lender can keep up to 2 months of cushion in the account at any time, but no more. If the cushion exceeds 2 months at the annual analysis, the servicer must refund the surplus within 30 days.
When impound is required
| Loan type | Impound required? |
|---|---|
| FHA | Yes, always |
| VA | Yes, almost always |
| USDA | Yes, always |
| Conventional, LTV > 80% | Yes (lender requirement) |
| Conventional, LTV ≤ 80% | Optional in most states |
| Higher-priced mortgage loan (HPML, CFPB rule) | Yes, 5+ years |
If you put 20%+ down on a conventional loan, you can usually waive impound in most states (CA, NM, OR have specific opt-outs and lender fees for waiving). The trade-off: you handle your own tax and insurance bills directly, which means you keep the float (your money earning interest in your bank, not the servicer's) but you also have to remember the deadlines. Forgetting a property tax bill means a tax lien and possible default — which is exactly why lenders prefer impound.
The shortage / surplus surprise
The most common impound complaint: your monthly mortgage payment suddenly jumps $150 mid-loan. That's the annual escrow analysis kicking in. Property taxes went up, insurance re-rated, and now the servicer is short the money to pay the next bill. They make it up two ways:
- Lump-sum — you pay the shortage in one check.
- Spread over 12 months — your monthly payment increases to make up the shortage and re-build the cushion.
Most servicers default to option 2 unless you explicitly choose option 1 in writing. The servicer is required by RESPA to send you the analysis statement annually so you can verify the math.