Imagine you’re in a situation where you find a house you love and want to buy. You may even be in the final stages of closing on this imaginary dream home. Then, an unexpected snowstorm passes through, revealing a leaky roof that needs major 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 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 is the buyer to do? In this scenario, might an escrow holdback be possible?
Escrow Holdbacks Defined
An escrow holdback agreement is 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. Another name for an escrow holdback is a repair escrow. This may sound like a pretty good deal, but an escrow holdback is not a possibility for every borrower and in every scenario.
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 affect 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 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 homebuying process. (On that note: Both buyer and seller may want to prepare for the possibility of higher-than-expected closing costs.)
Another example could be a seller who needs the proceeds from the sale of the home in order to comply with the repair request.
Generally, the appraiser calls out the more obvious issues 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.
How Does the Escrow Holdback Process Work?
Normally, the first step is the buyer and sellers agents negotiating the repair through an addendum to the purchase contract is drawn up by the real estate agents and signed by all parties.
It 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 in 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, improvements must be completed within 180 days of the mortgage closing date.
Lender will likely establish an escrow completion account with the title company from the purchase proceeds equal to the 120% of the estimated cost for completing the improvements, and more.
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It’s good 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 new construction).
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 may qualify for an escrow holdback:
• Pest control
• Roof repair
• Septic tank issues
• Mechanics liens
• Yard cleanup
Again, there’s no sure thing when it comes to escrow holdbacks 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.
A lender generally won’t want to make a loan for a property that they consider present health or safety issues.
Not all properties are considered lendable and different loan programs have their own unique requirements.
What If Your Situation Doesn’t Qualify for a Holdback?
What can you do if the lender doesn’t approve an escrow holdback? There’s not much, unfortunately. 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 things like, the follow up involved in closing the holdback or difficulties in getting the repairs completed within the specified period of time given. Lenders have been burned in the past when repairs have not been completed in a timely manner.
In the event that a lender refuses an escrow holdback and also refuses to make a loan, the buyer is in a 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 therefore issues can arise from making repairs.
No matter your situation, you may want to consider finding a lender that can help you navigate the home-buying process. While you’re in the process of shopping for a mortgage, check out customer service reviews in addition to rates and terms.
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