Escrow funds are collected at the time a loan is closed, plus the amounts collected monthly with the mortgage payments, to provide for the payment of property taxes and insurance (fire, flood, and mortgage). The funds belong to the borrower and are held in a non-interest bearing trust account until the taxes and/or insurance premiums become due. The lender cannot use these funds for any other purpose.

Because escrow funds are collected for the purpose of paying future taxes and insurance premiums, they are estimated figures. Lenders usually collect more than needed. On refinance transactions, the monthly payments for taxes and insurance are calculated based on current figures. On purchases, the monthly amount for taxes is based on the qualifying monthly figure (1.25% of the purchase price divided by 12). Insurance is based on the new annual premium, divided by 12.

The Real Estate Settlement Procedures Act requires that if there is an escrow account, the lender must give the borrower an initial escrow account balance within 45 days of closing (12 CFR § 1024.17 - Escrow accounts). Even though most lenders give this statement at closing, they do have 45 days from settlement.

Lenders are also required to provide an annual summary of the full escrow account. This annual report is to ensure the account is handled correctly and there are no shortages or overages due to the borrower.