Escrow
A neutral third-party arrangement that holds funds or documents — used both at a note closing and, separately, to collect taxes and insurance with each payment.
Escrow describes a neutral third party holding money or documents on behalf of two parties until agreed conditions are met. The word shows up in two distinct contexts that note holders should keep separate: the closing escrow that handles a note sale (or a property purchase), and the escrow account (also called an impound account) that a servicer uses to collect property taxes and insurance along with the loan payment.
Escrow at a note sale closing
When you sell a note, the transaction usually closes through an escrow or title company acting as a neutral intermediary. The escrow agent:
- Holds the buyer's funds until all conditions are satisfied
- Confirms the collateral file — original note, endorsements, recorded mortgage, assignments
- Verifies chain of title and lien position via a title search
- Prepares and records the assignment transferring the lien to the buyer
- Disburses the purchase price to you once everything is in order
This protects both sides: you do not hand over the note before being paid, and the buyer does not release funds before receiving enforceable, properly documented ownership. Using a reputable closing/escrow agent is standard and a sign of a legitimate buyer.
Escrow account (impound account) on the loan
Separately, many mortgage notes include an escrow (impound) account. With each monthly payment, the borrower pays an extra amount that the servicer holds to pay property taxes and hazard insurance when they come due. This ensures taxes and insurance are kept current — which protects the lender's collateral, since unpaid property taxes can become a senior lien ahead of even a first mortgage.
Why escrow matters for note value
- Closing escrow makes a sale safe and credible.
- An escrow account on the loan is a quiet value protector: it keeps taxes and insurance paid, preventing the kinds of senior-lien and uninsured-loss surprises that erode a note's collateral. A note buyer views a properly escrowed, professionally serviced note favorably.
- Many owner-financed notes are not escrowed (the seller never set one up), leaving the borrower to pay taxes and insurance directly. That is workable, but buyers will want proof taxes and insurance are current, and a title search checks for tax liens.
What it means when you sell
Expect the sale to close through escrow — that is normal and protective. On the loan side, be ready to show that property taxes and insurance are current, whether through an escrow account or direct proof. Clean tax/insurance status removes a common diligence hurdle and supports a smooth, well-priced sale.