A property sale requires money and title to change hands simultaneously, which is impossible to arrange between two parties who do not trust each other. Escrow is the structure that resolves it.
The problem is that neither side can go first
If the buyer transfers funds before title moves, the money is exposed. If the seller signs over title before payment arrives, the property is exposed instead.
Neither party has an incentive to accept that exposure, and the sums involved are large enough that goodwill is not an adequate substitute for a mechanism.
An escrow agent breaks the deadlock by holding both sides of the exchange until it can release them together, so no one is ever unprotected.
Instructions define what the agent may do
The agent acts on written instructions agreed by both parties rather than on its own judgment. Those instructions list the conditions that must be satisfied before release.
Typical conditions include a clear title search, satisfaction of the lender's requirements, completed inspections and any repairs the contract obliged the seller to carry out.
Because the agent is bound to the instructions, it cannot favour either side, and a dispute over whether a condition was met stops the process rather than being decided by the holder of the funds.
The deposit is held, not paid
The buyer's deposit goes to the escrow account rather than to the seller, which is the difference between a good-faith commitment and a payment on account.
If the transaction completes, the deposit is applied to the purchase price. If it fails, the contract determines who receives it, and the agent releases accordingly.
Where the contract terms are contested, the money stays where it is until the parties agree or a court decides, which is precisely the protection the arrangement offers.
Title work happens in the same window
While funds sit in escrow, a search establishes whether anyone else has a claim on the property: unpaid taxes, contractor liens, easements or an unreleased earlier mortgage.
Any encumbrance found must generally be cleared from the sale proceeds before completion, which is why payoff figures are requested from existing lenders during this period.
Buying without that step means inheriting whatever claims attach to the property, since most of them travel with the land rather than with the previous owner.
Some accounts continue after completion
Lenders often maintain a separate escrow account after the sale, collecting a portion of property taxes and insurance premiums alongside the monthly mortgage payment.
The lender pays those bills when due, which protects its collateral against a lapsed policy or a tax lien that would rank ahead of the mortgage.
Balances are reviewed periodically and adjusted, so a payment can change without the interest rate changing, purely because the underlying tax or premium moved.