fbpx Skip to content

What Is Escrow On A Mortgage?

Reviewed by: David Naimey

Approved by: Chad Turner

For this blog update, we will be discussing the mortgage term “escrow,” and what it means for the first time home buyer’s mortgage lending process. Escrow in the mortgage lending process is essentially an account that is created during the lending process that holds items such as the Earnest Money Deposit and Due Diligence checks. This account is created by a third party, such as an agent, attorney, closing escrow officer, or title company escrow officer, to hold documents such as Earnest Money Deposit and Due Diligence checks and other contract items until closing. The escrow officer makes sure that the Earnest Money Deposit and Due Diligence checks as well as other documents exchange hands in a smoothly and timely manner at the closing table.

What is eligible to go into an Escrow Account?

An escrow account will usually contain items that depend on the Purchase Contract. For example, a Due Diligence check isn’t required for every loan, but if it’s on the Purchase Contract it will be placed into the Escrow Account. Another item that may not be on every Purchase Contract is a home inspection. The cost for a home inspection, required home repairs, termite inspection, or water tests may also be added to the Escrow account, depending on how the Purchase Contract is executed. When these are completed, the Escrow officer keeps these items in the escrow account as the loan progresses.

Escrow and Tax Prorations

Another purpose for an escrow account that lenders will also take advantage of is paying off the tax prorations owned on the property at closing, as well as paying for the first year of homeowner’s insurance for the first time home buyer. Property Tax Proration is essentially the splitting or allocating of property taxes for closing costs. The tax proration costs can go to the seller, the first time home buyer, or both seller and buyer, with the costs split. This allocation is based on how far into the year the sale is happening compared to the the tax due dates and the tax amounts. Whether the taxes are due or have been paid for the current year also determine the allocation of the tax prorations. The tax prorations for the first time home buyer will be reflected on the final closing disclosure form drawn up at closing.

Escrow Accounts and Homeowner’s Insurance

As mentioned before, the homeowner’s insurance in most cases will be paid by the lender. The lender will use the escrow account to cover the first annual payment for Homeowner’s Insurance to insure that the home is insured. The first time home borrower is not at all required to keep home owner’s insurance on homes, however it is highly recommended as repairs for a home can quickly add up in cost. These costs can skyrocket, especially during times of natural disasters such as flood, hurricanes, tornadoes, and earthquakes. The first time home buyer should keep in mind that flood insurance, if it is required by the lender before closing, is paid out of pocket by the first time home buyer, not out of the escrow account. The underwriter, before a loan is issued a clear to close, must have an active flood insurance policy with a paid invoice to prove it.


Written by: