The process of buying a home can be confusing. You’ll hear a lot of terms being tossed around; some you may understand and some that may leave you scratching your head. “Escrow” is one of those terms that sounds like a foreign language to many first-time homebuyers.

If you’re wondering what escrow means, read on for a basic definition of this home-buying term.

Escrow Explained

Escrow is a term that describes when an impartial third-party holes onto something that’s valuable when a transaction is being made. In terms of buying a home, escrow refers to money that you will give to a neutral third-party – an escrow service – and that third-party will hold onto the money until both you and the seller of the property have successfully negotiated and finalized the purchase. The money you furnish is known as “earnest money”.

The money that’s placed in escrow cannot be touched by either you or the seller until after the deal has been sealed.

Why is Escrow Important?

Escrow protects both the buyer and seller. If the buyer were to give earnest money directly to the seller, the seller could use the money as a way to negotiate terms that are better for him or her. Similarly, if the buyer were to hold onto the earnest money, the seller won’t be interested in handing over the deed to the property.