Educational reference only. Escrow laws vary by state. Verify details with a licensed escrow professional or attorney.
From aggregate accounting to wire instructions, these are the terms you will encounter when buying a home, managing a mortgage escrow account, or using escrow for an online transaction. Each definition links to the relevant guide page for deeper reading.
The RESPA-mandated method for calculating your escrow cushion. Instead of looking at each disbursement item separately, your lender projects your account balance month-by-month for the coming 12 months. The lowest projected balance must stay at or above zero (or your target cushion). This prevents lenders from over-collecting compared to the old single-item method. Codified at 12 CFR § 1024.17(d).
A line on your Loan Estimate or Closing Disclosure that reduces your initial escrow deposit. When the aggregate accounting calculation shows you were asked to deposit more than the maximum allowed, the lender issues this credit at closing to bring you back within RESPA limits. A negative number on line G is actually good news for the borrower.
A clause in a purchase contract that lets the buyer back out, and typically recover their earnest money, if the property appraises below the agreed purchase price. If a $450,000 home appraises at $420,000 and the seller will not lower the price, the buyer can invoke this contingency and exit escrow. Without it, the buyer must either make up the gap in cash or lose their deposit.
A five-page federal form (CFPB form H-25) that lists every cost, credit, and term of your mortgage. You must receive it at least three business days before closing. Page 4 covers escrow-account specifics: projected monthly payments, initial escrow deposit, and a 12-month payment schedule. Compare it carefully to your Loan Estimate; differences exceeding tolerance thresholds must be corrected.
A condition that must be satisfied for a real estate contract to become binding. Common contingencies include financing, appraisal, inspection, and title. During the contingency period, the earnest money is typically refundable if the buyer lawfully cancels. Once all contingencies are removed, the deposit becomes at-risk if the buyer backs out without cause.
The buffer your lender is allowed to hold above and beyond what is needed to pay your next disbursements. RESPA sets the maximum cushion at one-sixth (1/6) of your total annual escrow disbursements, roughly two months of payments. A lender may hold less but not more. If your account exceeds the cushion by more than $50, the lender must refund the excess within 30 days of the annual escrow analysis. Defined at 12 CFR § 1024.17(c)(1)(ii).
A deposit a buyer makes to demonstrate serious intent when submitting an offer, typically 1-3% of the purchase price. It is held in escrow by a title company, real estate broker, or escrow agent. If the deal closes, it is applied to your down payment or closing costs. If the seller breaches the contract, the buyer typically gets it back. If the buyer backs out without a valid contingency, the seller may keep it as liquidated damages.
A review your mortgage servicer must perform at least once per year under RESPA. The servicer projects 12 months of expected deposits and disbursements, finds the lowest projected balance, and compares it to the required cushion. If you have collected too much you get a refund; too little and you may owe a shortage. Results are disclosed on your Annual Escrow Account Disclosure Statement.
The condition where your escrow account has gone negative, meaning disbursements were made that exceeded the available balance. This is more severe than a shortage (which is a projected shortfall) because the lender has already advanced funds on your behalf. Deficiencies must be cured; lenders typically demand immediate repayment or spread recovery over 2 months rather than the standard 12-month shortage plan.
The neutral third party that holds funds or documents on behalf of the transaction parties until all conditions are met. In a real estate purchase this is typically a title company (title states) or a dedicated escrow company (escrow states) or an attorney (attorney states). In online transactions it is a licensed escrow service such as Escrow.com. The escrow holder has a fiduciary duty to follow the escrow instructions and not release funds prematurely.
A projected shortfall identified during your annual escrow analysis. If property taxes or insurance costs rose since last year, your monthly contributions may no longer be sufficient to cover upcoming disbursements. You can pay the shortage as a lump sum or spread it across 12 months (adding to your monthly payment). Per 12 CFR § 1024.17(f)(5), lenders may not require you to cure a shortage under $50.
The condition where your escrow balance is higher than the maximum allowed (target balance plus cushion). RESPA requires your servicer to refund any surplus of $50 or more within 30 days of the annual analysis. Surpluses commonly arise when property taxes are reassessed downward, a cheaper insurance policy is obtained, or PMI is cancelled.
Permission from your lender to pay property taxes and homeowners insurance directly rather than through a lender-managed escrow account. Typically available on conventional loans with at least 20% equity (LTV at or below 80%). Lenders often charge a fee of 0.125-0.25% of the loan amount for the waiver. FHA and most USDA loans require escrow regardless of down payment.
A contract clause allowing the buyer to cancel and recover their earnest money if they cannot secure a mortgage loan on specified terms (rate, amount, loan type) by a set deadline. The contingency date is typically 3 to 4 weeks after contract acceptance. Waiving this contingency is common in competitive markets but exposes the buyer to losing their deposit if financing falls through.
State laws that require escrow and title companies to verify that all funds have actually cleared before disbursing proceeds at closing. Most states require wired or certified funds for amounts above a threshold (typically $10,000). Good funds laws protect sellers from the escrow agent releasing title before the buyer's payment clears. California, Texas, and Florida have among the strictest requirements.
An amount retained in escrow after closing to cover a known but unresolved item, such as incomplete repairs, unpermitted work, or a disputed invoice. Common in purchase transactions where a repair could not be completed before closing. The holdback is typically 1.5 times the estimated repair cost and is released when work is verified complete. In M&A transactions, a holdback is a portion of the purchase price held post-closing to cover indemnification claims.
Another name for a mortgage escrow account, commonly used in California and the western United States. Your lender 'impounds' a portion of each monthly payment to build up reserves for property tax and insurance disbursements. The terms impound account, escrow account, and reserve account are interchangeable in the mortgage context.
The upfront amount you pay into your escrow account at closing to pre-fund the account before your first monthly payment arrives. Typically covers 2-3 months of property taxes and 2 months of homeowners insurance, with the exact amount set by the aggregate accounting calculation. Shown on your Closing Disclosure alongside the aggregate adjustment credit if any.
A contract clause giving the buyer the right to have the property professionally inspected and to cancel or renegotiate based on findings within a set period (typically 7-14 days). Unlike an appraisal contingency, the inspection contingency can be used for any material defect, not just value. Buyers can request repairs, a price reduction, or credits at closing, and can walk away with earnest money returned if the seller refuses.
The company that collects your monthly mortgage payments, manages your escrow account, sends annual escrow analyses, and handles default or forbearance. Your servicer may be different from your original lender; servicing rights are frequently sold. Under RESPA, the servicer must notify you at least 15 days before a servicing transfer. For escrow disputes, contact your servicer's escrow department directly.
The four components that make up a typical monthly mortgage payment. Principal reduces your loan balance. Interest is the cost of borrowing. Taxes are your property tax contributions held in escrow. Insurance covers homeowners insurance (and PMI if applicable) also held in escrow. Lenders use PITI to calculate your debt-to-income ratio for qualification. PITI payments are what most people mean when they say 'my mortgage payment.'
Insurance that protects the lender (not you) if you default, required on conventional loans when the down payment is less than 20% (LTV above 80%). Premiums are typically 0.5-1.5% of the loan amount annually and are collected through your escrow account. PMI can be cancelled once your LTV reaches 80% at your request, and must be automatically terminated at 78% LTV under the Homeowners Protection Act of 1998.
A 1974 federal law (12 USC § 2601 et seq.) that governs real estate settlement costs, prohibits kickbacks, and sets detailed rules for mortgage escrow accounts. Regulation X (12 CFR Part 1024) is the implementing regulation, now enforced by the Consumer Financial Protection Bureau (CFPB). RESPA Section 10 specifically covers escrow accounts, limiting cushion amounts, requiring annual analyses, mandating shortage notices, and requiring refunds of surpluses. Violations can result in damages of up to three times the charge amount.
The implementing regulation for RESPA, codified at 12 CFR Part 1024. Section 1024.17 is the escrow-specific rule: it defines aggregate accounting (subsection (d)), sets the cushion limit (subsection (c)(1)(ii)), specifies the annual analysis requirement (subsection (f)), governs shortage repayment plans (subsection (f)(5)), and requires refunds for surpluses over $50 (subsection (f)(2)(ii)). Any escrow dispute you escalate should reference specific subsections.
Insurance that protects against financial loss from defects in a property's title, such as undisclosed liens, forged deeds, or ownership disputes. There are two types: a lender's policy (required by virtually all mortgage lenders) and an owner's policy (optional but strongly recommended). Both are purchased at closing and paid as a one-time premium. Title insurance is distinct from homeowners insurance and is not collected through your ongoing escrow account.
A government tax levied when real property changes hands, expressed as a percentage of the sale price. Rates and responsibility (buyer vs seller) vary dramatically by state and county: California charges 0.11% at the county level (plus city taxes), New York City adds 1-2.075% on top of state taxes, while Texas and 12 other states charge no transfer tax at all. Transfer taxes are collected at closing and disbursed by the escrow holder.
The bank routing number, account number, and reference information used to send closing funds by wire transfer. These are the primary target of real estate wire fraud: criminals intercept legitimate communications and substitute fraudulent instructions. To protect yourself: call your escrow officer or title company on a verified phone number to confirm wire instructions before sending any funds. Never email sensitive financial instructions, and treat any last-minute change in wire details as a red flag.