How Escrow Accounts Work for Home Buyers in California

When buying a home in California, or even when simply researching the process, you’ll eventually encounter the term “escrow account.”

This can be a very confusing subject for first-time buyers, in particular, since they’ve never been through the process before. But it’s a very important topic to understand.

This guide explains what an escrow account is and how the process works in California.

1. There are two main types of escrow accounts. One is used during the home buying process (holding earnest money, down payment, and closing costs), while the other is used for property taxes and insurance after purchase.
2. The escrow account serves as a neutral holding place for funds until all conditions are met, ensuring a smooth and safeguarded transaction.
3. A neutral third party, known as an escrow agent, will manage and release the funds only when all terms of the sale have been satisfied.
4. Escrow helps keep real estate transactions on track, preventing confusion and ensuring all funds and documents are in place before closing.
5. Escrow has strict timelines, requires clear instructions, and involves fees. Buyers should carefully review documents and meet deadlines to avoid complications.

Different Kinds of Escrow Accounts in California

Let’s start with a basic definition and move on from there. In general terms, an escrow account is a type of legal holding account used for a short period of time. They’re typically used to hold funds relating to certain types of transactions, such as a home purchase.

You might actually encounter two different types of escrow accounts when buying a home in California, and when making your mortgage payments each month. This is one reason why home buyers tend to find this subject so confusing. There are different types of accounts, and they often go by different names.

• The first type of escrow account is used during the home buying process. It usually includes the earnest money deposit, down payment, and closing costs.
• The other type of escrow account is used for property taxes and insurance, and is managed by your mortgage loan servicer. Once you take ownership of the home, your servicer will take a portion of your monthly payment and hold it in an escrow account until your tax and insurance payments are due.

So there’s one type of account that you encounter during the home buying process, and another one that relates to your monthly mortgage payments. In a typical real estate transaction, these are usually two different things.

To avoid confusion, it’s probably best that we focus on just one of these accounts for this article. So let’s talk about the one that’s used during the home buying process.

A Safe Place for the Home Buying Funds

When you make an offer on a house, you might also make an earnest money deposit to show the seller that you are serious about purchasing the home. This is common practice within the California real estate market.

That money needs to go somewhere, and the escrow account is one place for it.

You might also make a down payment on the house, and pay closing costs to cover all of the fees that can accumulate during the process.

All of these different funds go into an escrow account, which is managed by an escrow agent or company.

These funds will be held in the escrow account until all relevant conditions have been satisfied or completed. At that time, the agent or company managing the account will release the funds to the appropriate parties, finalizing the sale.

Helping to Keep the Process on Track

In order for a real estate transaction to move forward, all of the necessary funds and paperwork need to be in place.

This is where the home buyer’s escrow account comes into the picture. The escrow company will make sure that everything is in place leading up to closing day, for a smoother process.

If it weren’t for escrow companies, real estate transactions would be a lot messier than they are. There would probably be a lot more confusion as well.

These companies help to keep the entire process on track, by making sure all funds needed to complete the transaction are in place and ready for distribution.

As you’ve probably already guessed, you will likely pay a fee for the escrow company’s time and services. This is one of the fees that make up your closing costs, along with mortgage-related fees, government recording fees, etc.

In California, the cost of escrow services can vary based on the price of the home and other factors.

Related: How long does the escrow process take?

How the State of California Defines Escrow

In one of their official handbooks, the California Department of Real Estate (DRE) defines escrow as follows:

“A grant may be deposited by the grantor with a third person, to be delivered on the performance of a condition, and, on delivery by the depositary, it will take effect. While in the possession of the third person, and subject to condition, it is called an escrow.”

• Protection Through Neutrality: Because the escrow holder doesn’t favor one side, your money and property documents are safe until all conditions are met.
• Escrow Holder: This person or company acts as a neutral agent. Their job is to make sure both parties follow the agreed terms before releasing funds and transferring documents.
• Conditional Delivery: The buyer and seller agree on certain conditions (like financing, inspections, or repairs). Funds and documents aren’t released until these conditions are fulfilled.
• Clear Instructions Are Key: Escrow instructions spell out all the details—like the purchase price, inspection details, and closing date. These instructions should be clear so that all parties involved know what’s expected.
• Review Documents Carefully: Review all escrow-related documents prior to signing or finalizing anything. If you’re unclear about any part, ask questions or consult professionals like your real estate agent or attorney.
• Timely Performance: Escrow has strict timelines. Missing deadlines could lead to the escrow being canceled, which might mean you lose your earnest money deposit or have to restart the process.
• Funds Handling: The escrow account is carefully managed. The funds are held securely and only released when all checks have cleared and conditions are met. This helps prevent mix-ups or premature disbursements.
• Confidentiality: All the details and documents in escrow are kept confidential. This ensures that your personal and financial information isn’t shared with unrelated parties.

Learn More About the Mortgage Process

Bridgepoint Funding serves home buyers and homeowners all across the state of California.

As a mortgage broker, we have access to a wide range of loan options. We can also answer any questions you have about qualifying for a home loan, or other aspects of the mortgage process.

We also maintain one of the largest resource libraries for home buyers in California, featuring more than 100 high-quality articles and tutorials. You can access them by using the search tool at the top of this page.