What Is Escrow and How Does It Work in a New York Home Sale?

“Escrow” is a word that appears constantly in real estate conversations and is understood vaguely by most buyers and sellers. It refers to a holding arrangement – funds or documents held by a neutral third party until specific conditions are met – but the specific mechanics in New York transactions differ from how escrow works in other states.

Escrow for the Contract Deposit

When a buyer goes to contract on a New York home, they deliver a deposit – typically 10% of the purchase price – that is held in escrow until closing. In New York, unlike many other states where a title company holds the escrow, the deposit is most commonly held in the escrow account of the seller’s attorney.

The seller’s attorney maintains this money in a dedicated, segregated attorney escrow account – not commingled with the firm’s operating funds. The funds sit in escrow until one of three things happens: the transaction closes and the deposit is credited to the buyer’s funds at closing; the buyer exercises a valid contractual contingency and the deposit is returned; or a dispute arises over the deposit that requires legal resolution.

The seller cannot access or spend the deposit while it’s in escrow. It isn’t the seller’s money yet. It remains in neutral holding until the transaction resolves.

What Happens to the Deposit If the Deal Falls Through

As discussed in an earlier post, what happens to the deposit depends entirely on why the deal fell through. If the buyer defaults without a valid contractual basis – they simply decide not to close – the seller is entitled to retain the deposit as liquidated damages under most standard New York contracts. If the buyer exercises a valid contingency – a mortgage contingency because financing fell through, or an inspection contingency because of significant findings – the deposit is returned to the buyer.

Disputes over deposit entitlement are resolved by the attorneys first; if they cannot agree, the matter goes to court. The seller’s attorney holding the deposit cannot simply release it to either party without both parties’ consent or a court order directing disposition.

Escrow for Taxes and Insurance in Your Mortgage

The second use of “escrow” in real estate – and the one that affects homeowners throughout their ownership – is the mortgage escrow account your lender may require for property taxes and homeowner’s insurance.

If your lender requires escrow, a portion of your monthly mortgage payment – in addition to principal and interest – goes into an escrow account held by the lender. When your property tax bills come due, the lender pays them directly from this account. Same for your homeowner’s insurance premium. You never write a separate check for taxes or insurance; the lender manages these obligations from the escrow fund.

Lenders require escrow primarily to protect their collateral – ensuring taxes and insurance are paid even if the borrower would otherwise let them lapse. In New York, with property taxes often exceeding $15,000 to $20,000 annually, the escrow accumulation can be substantial.

Your lender conducts an annual escrow analysis to confirm the account is adequately funded. If the analysis shows a shortfall – often because taxes increased – you’ll receive a notice of a new, higher monthly payment or a request for a lump-sum catch-up payment.

The Escrow at Closing

At the closing table, the deposit held in escrow is credited against the buyer’s total funds due. The buyer doesn’t bring the full purchase price to closing – they bring the purchase price minus the deposit already in escrow, plus closing costs. The escrow account is effectively dissolved at closing as the funds are disbursed.

I walk every buyer and seller through exactly how their funds are held and when they move throughout the transaction. Nothing in a New York closing should happen without full understanding. Call me at (321) 447-4259 or visit movewithricky.com.

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Rakesh (Ricky) Khanna | Licensed Real Estate Salesperson
Better Homes and Gardens Real Estate Realty Connect
Call or text: (321) 447-4259 | movewithricky.com