Escrow at closing
From contract to closing, the escrow holder is the deal’s referee. It takes in the deposit, orders the title search, collects payoff figures from existing lenders, prorates taxes and rents between buyer and seller, prepares the settlement statement, disburses funds, and records the deed. Practice differs regionally: in some states an escrow company runs the process, in others a title agent does, and in attorney-closing states a lawyer handles it. The written instructions are what bind everyone, which is why ambiguous contract language turns into delays at the settlement table rather than being resolved quietly.
Escrow after closing
Most residential lenders escrow taxes and insurance, adding roughly one twelfth of the annual bills to each payment and paying those bills as they come due. That is the T and the I in PITIA, and it is why the payment quoted as principal and interest is never the payment you actually make. Escrow accounts are analyzed periodically, and a shortage — usually from a tax reassessment after your purchase or an insurance renewal at a higher premium — shows up as a lump-sum demand plus a higher monthly payment. Underwrite a purchase using the reassessed tax figure, not the seller’s.
What investors watch
Three things. Whether your loan waives escrow, which frees cash flow but hands you the discipline of saving for a large annual bill yourself. Whether prorations at closing are calculated the way you expect, since tenant rents, security deposits, and prepaid taxes all change the cash you bring. And whether the escrow holder is one you chose, because on distressed, probate, and same-day resale transactions the competence of the closing agent decides whether the deal funds on time. Rules for holding tenant security deposits vary by state — confirm yours.
Common escrow surprises
Two catch investors repeatedly. The first is the escrow shortage in year two, when the county reassesses the property at your purchase price and the lender collects the difference plus a cushion — a payment jump that was entirely predictable and rarely budgeted. The second is closing-day proration on a tenanted property, where prepaid rent and transferred security deposits move your cash to close in either direction. Ask for a draft settlement statement a few days early and read every line, because errors are far easier to fix before funds move.
Related terms
- Earnest money — The good-faith deposit a buyer puts up when a contract is signed, held by a neutral third party and credited toward the purchase at closing.
- Title insurance — A one-time-premium policy protecting against defects in a property’s ownership history — forged deeds, missed heirs, unpaid liens, recording errors.
- PITIA — Principal, Interest, Taxes, Insurance, and Association dues — the full monthly cost of owning a financed property.
- Double close — Two back-to-back closings on the same property, usually the same day: you buy from the seller, then immediately sell to your end buyer.