What is Escrow?

If you’ve heard anybody talk about buying a house, you’ve probably heard the term “escrow.” But do you know what it means? It’s a common term associated with the home-buying process, although not always related to real estate, but it’s often misunderstood.


Escrow is when funds are entrusted to a neutral third party until a set of conditions are met by both the buyer and seller.


Adding to the confusion, there are two different times escrow may be referred to in the home-buying process, and while they have the same foundation, they refer to different transactions. In addition to placing earnest money into escrow, an act of good faith by the buyer while closing on a house, you can also open an escrow account with Santander Bank.

The Escrow Process When Closing on a Home

The first time you’ll likely encounter escrow as a homebuyer is after a seller accepts your offer. A seller will require you to offer earnest money as a good-faith measure in the transaction. The amount of earnest money required may vary, but often ranges between 1%–3% of the purchase price of the home. Paying earnest money demonstrates that you are committed to purchasing the home throughout the closing process, which on average takes 50 days.


Several things could happen during the closing process that could lead you not to go through with the purchase, such as problems discovered during the inspection. Because one or both parties may end up not going through with the transaction, it could be risky to entrust the seller with the earnest money, as they may not be willing to pay it back if the purchase falls through. Paying the earnest money into escrow eliminates this risk. If all conditions are met at closing, the earnest money is paid by the escrow-holding company to the seller as part of the down payment on the home. If either the buyer or seller chooses not to go through with the home purchase, the earnest money will be returned to the buyer, as more specifically described in your contract with the seller.

What is an Escrow Account?

After the home has been purchased, an escrow account takes money from your monthly mortgage payment and sets it aside to pay other recurring payments related to your home, such as property taxes, mortgage insurance, flood insurance, or homeowner’s insurance. Escrow accounts for these costs are a requirement for most home purchase loans. While most of these costs only occur once a year, they are baked into your monthly mortgage payment, in addition to principal and interest on your home loan, to ensure that the funds are available when payment is due. Santander Bank will then withdraw funds from the escrow account and pay any bills connected to your account when they are due.


An escrow account can be set up when you close on your home loan. Talk to your Mortgage Specialist about how to set up an escrow account.

What is escrow analysis?

An escrow analysis is a regular review of your escrow account to ensure that you have sufficient funds to cover all payments coming out of the account. You may end up with an escrow shortage, meaning your account does not have enough in it to cover all required transactions, or an escrow surplus, meaning your account has more than is necessary in it. Escrow shortages and surpluses occur when taxes or insurance premiums change throughout the year. Santander Bank will issue a statement after your escrow analysis to let you know if you have a shortage or a surplus, and let you know if you can expect your monthly mortgage payment to change.


Have additional questions about the mortgage process? Visit our Mortgage FAQs or contact a Mortgage Specialist.

All loans are subject to approval.

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