Defined simply, escrow is a financial instrument (i.e., funds, deeds, bonds, documents, etc.) held by a third party until certain conditions of a transaction are met. In the housing industry, escrow companies hold funds for a home sale until both the buyer and seller have fulfilled their respective conditions and responsibilities.

Escrow typically opens once the purchase agreement is signed and the buyer pays their deposit. The escrow company then holds these funds and protects both parties by ensuring that no funds are transferred until all the conditions of the purchase agreement are met.

When deciding what company to use for escrow, make sure to choose an independent licensed provider who is 1) 100% neutral; 2) licensed by the Department of Corporations; 3) exists for the sole purpose of providing escrow. The decision of what company to go through requires all parties' consent.

Especially since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, there have been tightened regulations around escrow companies and lending practices in general. For example, escrow companies are strictly forbidden from receiving referral fees. This and other laws help ensure escrow companies remain natural and unbiased.

One of the most important things you can do to protect yourself during escrow is to read and understand your escrow instructions. An escrow officer can sort out misunderstandings before you sign the final paperwork, but your escrow officer cannot give advice on what actions you should take and whether or not those actions are favorable. If you need legal or financial advice, you'll have to consult your lawyer or financial advisor.