What does the term 'escrow' typically refer to in real estate transactions?

The term 'escrow' in real estate transactions refers to a deposit held by a third party until specific conditions of the transaction are met. This process is crucial as it ensures that both the buyer and seller fulfill their obligations before the funds or property change hands. For example, in a home purchase, the buyer may deposit earnest money into an escrow account. This money is then held securely until all conditions of the sale—such as inspections, financing approval, and contract contingencies—are completed satisfactorily. Only after these conditions are satisfied does the escrow company release the funds to the seller and the deed to the buyer, promoting fairness and security in the transaction.

Understanding this concept is vital for anyone involved in real estate, as it ensures that both parties are protected against potential risks associated with the transaction. Other options like a type of mortgage, a closing statement, or an appraisal report serve different purposes within the real estate process and do not represent the function of an escrow account.