What is escrow and what role does it play in closing?

• A. To provide financing for the buyer
• B. To hold funds and documents and ensure proper distribution at closing
• C. The title department's process for recording the deed
• D. An insurance policy for the mortgage loan

Answer: (B)

Escrow is a neutral third party in a real estate transaction that holds funds and important documents until closing. It keeps the buyer’s earnest money and down payment, along with loan proceeds and documents like the deed and mortgage, in a secure place. This setup protects everyone because funds aren’t released and documents aren’t recorded until all conditions are met—loan approval, clear title, and accurate prorations for taxes and dues. At closing, the escrow holder disburses funds to the right parties: paying off any existing liens, delivering the seller’s net proceeds, covering closing costs, and ensuring the deed is recorded with the county. In short, escrow manages the money and documents and ensures they are distributed and recorded properly at closing. It doesn’t provide financing, it isn’t the title department’s recording process, and it isn’t an insurance policy for the loan.