What Is An Escrow Holdback, And How Can It Help You Close On Time?

Your property appraiser just noticed new damage to the home you’re trying to buy. You really don’t want to push back your closing day. The good news? You may not have to wait. An escrow holdback could help you finalize your real estate transaction on time. Here’s how.

What Is An Escrow Holdback?

Buying a home is a process, and several factors can impact how long it takes to close on a house. You could lose your financing, the property could appraise for less than the agreed-upon purchase price, or a home appraisal or home inspection may uncover issues that need to be repaired.

If repair work or new construction approval is preventing you from closing on schedule, an escrow holdback may be an appropriate solution. An escrow holdback is the act of collecting additional funds at closing that will be refunded after necessary repairs have been made to the purchased property. In other words, a holdback is a tool that incentivizes the buyer or seller to fix the home promptly to get their money back.

An escrow holdback could also help you keep your closing date if you’re refinancing. If your home requires repairs due to normal wear and tear or other minor issues, your lender may agree to an escrow holdback to keep the transaction moving.

What Is Escrow

Escrow is when a third party maintains an account where deposited funds are kept until a stipulated event occurs, like closing on a property. In real estate, an escrow account is used to hold your deposit on a home until closing. Typically, you’ll also have an escrow account post-closing that puts aside part of each mortgage payment to cover property taxes and homeowners insurance.

How Does An Escrow Holdback Agreement Work?

Adding To The Real Estate Contract

An escrow holdback, or repair escrow, starts with an addendum to the real estate contract that details the repairs to be made, the estimated cost for the work, the deadline for completion and how contractors will get paid. Escrow holdback clients can also opt to do the work themselves without receiving compensation. Since they won’t have to pay a professional in this case, they’ll save money and have more control over the project.

Signing And Submitting

Both the buyer and seller must sign the escrow holdback agreement before it gets submitted to the lender. Assuming the loan underwriter approves the escrow holdback, the lender will either partner with the title company to establish an escrow account or handle that in-house.

Paying For And Making Repairs

Although there are exceptions, the seller is generally responsible for putting up the money for the escrow holdback. If the seller needs to sell the home to afford the repairs, the account will get funded with proceeds from the property's sale.

Often, the lender will require that an escrow holdback’s account balance exceed the estimated repair costs. Rocket Mortgage® currently requires 120% of the repair estimate. The extra funds are reserved in case the repair costs increase during the project. Repairs must also be completed within a specified time frame (typically a set number of months).

Verification

Once the property has been fixed, a final inspection will take place to verify that the work has been completed. If the repairs are finished in a timely and satisfactory manner, the escrow account will release the funds. Since a substantial amount of money is locked up until the job is done, the seller (and sometimes the buyer) is financially motivated to fix the home quickly.

One note of caution: The underwriter doesn’t have to approve your escrow holdback request. If they deny it, the home will likely need to be repaired before you close.

What Types Of Problems Trigger An Escrow Holdback?

You can’t use an escrow holdback for all home repair issues. In general, lenders won’t finance a property with health and safety concerns. An escrow holdback typically applies to outdoor or weather-related damage or problems.

Some examples of issues that often lead to an escrow holdback include, but aren’t limited to:

• Deck
• Driveway
• Exterior paint
• Fence
• Final grade
• Gutters
• Landscaping
• Lawn seeding
• Patio/porch
• Pest treatment
• Sod
• Sprinklers
• Walkway(s)

This isn’t an exhaustive list. Specific terms vary from situation to situation – including what repairs get covered – so be sure to speak with your real estate agent for guidance.

Who Decides When An Escrow Holdback Is Necessary?

Based on an appraisal of the home, your lender generally decides when an escrow holdback is necessary