Congratulations; You’ve found a house you love and want to buy. You may even be in the final stages of closing on this dream home. But sometimes, you may need to access what’s known as an escrow holdback: a way of setting aside funds at the closing for repairs that are most definitely needed as you take ownership.
For example, what happens if a blizzard hits the week before your scheduled closing, revealing a leaky roof that needs major (pricey) repairs?
This wasn’t something that showed up in the initial inspection report. Or, maybe it did show up in the inspection report, but the issue is suddenly much more pressing in light of said snowstorm. Either way, these repairs can’t be made at this particular time because it’s winter and, well, it’s snowing outside.
What’s a buyer to do? In this scenario, an escrow holdback could be a path to funding the necessary repairs without blowing your closing date. Here, you’ll learn more about escrow holdbacks, including:
• What is an escrow holdback?
• How does an escrow holdback work?
• What qualifies for an escrow holdback?
• What if your situation doesn’t qualify for a holdback?
Escrow Holdbacks Defined
Before defining escrow holdbacks, here’s what escrow is: Typically, it’s money held by a third party as assets (such as real estate) are being transferred.
An escrow holdback agreement, however, occurs when money is set aside at the closing of a home to complete repairs. Generally, this is done at the seller’s expense, though not always.
Money is held in an escrow account until the repairs are completed. The funds can then be released. Another name for an escrow holdback that you may hear used is a repair escrow.
This may sound like a pretty good arrangement, but an escrow holdback isn’t a possibility for every borrower and in every scenario. Consider the following:
• The lender’s underwriter will review the appraisal and any accompanying inspection reports to confirm that the sales price is met and that the property does not show evidence of any deferred maintenance items that can have an effect on things like safety, soundness, or structural integrity.
• These are often referred to as health and safety issues. Health and safety issues can affect whether the home is eligible for financing.
• Most lenders will not close a loan on a home that has been called out for things like missing railing, stairs, fencing, and much more.
It’s not hard to imagine a situation where a homebuyer needs the seller to repair something that cannot be completed until after the contract’s closing date, like in the snowstorm example above. Depending upon the repair, a lender may allow for the seller to place funds in escrow for what’s known as defect cure within a specified period of time for a specified amount.
These repairs could be expected or unexpected as the parties move through the home-buying process. Generally, the appraiser calls out the more obvious issues that hurt a home appraisal and may recommend further inspection by an expert for something noted in their report. If an appraiser requests an inspection, the lender’s underwriter may review the report and require some repairs.
Another example of a situation in which an escrow holdback could be a valuable tool: when a seller needs the proceeds from the sale of the home in order to comply with the repair request.
These are examples of how and when an escrow holdback could be warranted and beneficial.
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How Does the Escrow Holdback Process Work?
If you’re curious about how the escrow holdback process works, consider these points that spell out the process in more detail:
• Normally, the first step is the buyer’s and seller’s agents negotiating any required repairs through an addendum to the purchase contract. This is drawn up by the real estate agents and signed by all parties.
• The document will likely outline the repairs that the buyer (or lender) would like the seller to make, the timeframe for those repairs, and details about how and when the payments to the contractors are to be made.
• This contract addendum is then sent to the escrow company (or the attorney) and to the lender, who will review the document. The underwriter of the loan will have the last say as to whether the escrow holdback is approved.
• If it is approved, then the closing may proceed as initially planned. However, not all holdback requests will be approved.
The lender may have conditions around the approval of an escrow holdback. These can include but are not limited to such requirements as improvements having to be completed within 180 days of the mortgage closing date.
• The lender will likely establish an escrow completion account with the title company from the purchase proceeds. This is typically equal to 120% of the estimated cost for completing the improvements and more.
• Once the repairs are completed, another inspection occurs to verify that the work has been satisfactorily finished. The escrow account can then release the funds.
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It’s important to note that not all transactions qualify for an escrow holdback. The criteria can vary between lenders, property, and even type of transaction (sale of existing property or of a new construction home).
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What Qualifies for an Escrow Holdback?
Generally, lenders prefer that repairs take place prior to the closing, but exceptions can be made — like when repairs must be delayed due to inclement weather.
This may limit escrow holdbacks to repairs that require some work on the outside of the home, such as repairs to a roof, yard, or plumbing accessed outdoors.
Here are some types of repairs that are factors that affect property value and residents’ safety and may qualify for an escrow holdback:
• Patio problems
• Pest control
• Roof repair
• Septic tank issues
• Sprinkler system problems
• Yard cleanup
Again, there are no sure things or guarantees of how an escrow holdback will work. That’s because it is ultimately up to all of the involved parties to agree on the terms.
Beyond the weather causing a delay, lenders are often looking to determine whether the repairs present a risk to the property (their collateral) or present health and safety issues to the prospective occupants. As you might imagine, a lender generally won’t want to make a loan for a property that they believe could threaten the health or safety of its occupants.
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What if Your Situation Doesn’t Qualify for a Holdback?
Say you believe there is an issue that merits an escrow holdback, but the lender doesn’t approve it. Now what? There’s not much, unfortunately, that you can do in this situation. The most likely scenario is that the closing date will need to be pushed out to make time for any required repairs before loan closing.
As you pursue an escrow holdback, it might be helpful to understand that some lenders’ guidelines may not offer escrow holdbacks under any conditions.
This could be due to such issues as the follow-up involved in closing the holdback proves too arduous. Or perhaps there are difficulties in getting the repairs completed within the specified period of time given. If lenders have been burned in any of these ways in the past, they may decide the process is too risky.
In the event that a lender refuses an escrow holdback agreement, you might have to delay your closing. If the lender also refuses to make a loan, you (the buyer) could be in a very tough spot. Even if you’re willing to pay for the cost of repairs in order to move forward with the lending process, this may not be in your best interest.
You do not yet own the property, and issues can arise from making repairs.
It may be wise to get your real estate lawyer’s and real estate agent’s opinions about how to handle this kind of difficult situation. They can help you explore any options that exist.
Recommended: First-time Homebuyer’s Guide
Escrow holdbacks can be a way to solve for needed repairs of a property you are interested in buying or have already begun to purchase. By keeping funds in this kind of account, the parties involved may be able to satisfactorily complete the work needed and pay for it in a clear and equitable way.
No matter your situation, you’ll likely want to work with a lender that can help you navigate the home-buying process. While you’re shopping for a mortgage, check out customer service reviews in addition to rates and terms.
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