Escrow holdback: How it can help you close on time

Imagine you’ve made an offer on a home and the seller has accepted. But on the road to closing, the home inspection reveals a significant defect that needs repairs. You want to buy the home, but don’t want to worry about costly repairs after you buy it. Also, your lender might be hesitant to approve your loan. In this situation, an escrow holdback, where the seller sets aside money that you can use to make repairs, can help you avoid paying for the fix out of pocket and help you close on time.

What is an escrow holdback?

Escrow refers to a third-party account that holds and disburses money for a specific purpose. In a home sale, the earnest money, down payment, closing costs, and mortgage funds are paid into an escrow account, allowing the third-party administrator to ensure it is correctly paid out to the seller and all parties providing services during the sale.

If a home appraiser or home inspector finds unexpected damage to a home and the purchase agreement includes an inspection contingency, the buyer and seller will need to agree who will pay for repairs.

An escrow holdback is one way to address the issue. The sale will close on schedule, but either some of the money due the seller will be held back in escrow, or the seller will deposit money into escrow to cover the cost of the repairs. When the repairs are completed, the escrow account will release the funds to pay the contractor or reimburse the buyer. If there’s any money left over, it will go to the seller.

What types of problems trigger an escrow holdback?

Generally, escrow holdbacks are used only for safety or health-related problems with a home. For example, if a storm damages the roof, the house may be uninhabitable until it’s repaired. Escrow holdbacks allow the sale to close before the repairs are finished.

Damage to these home features can often result in escrow holdbacks.

• Landscaping and lawns
• Decks and patios
• Driveways and walkways
• Roofs
• Gutters
• Fences
• Sprinkler systems
• Septic tanks

Pest infestations may also lead to an escrow holdback. If a home is damaged during the closing process, ask your real estate agent if an escrow holdback is a good idea.

How does an escrow holdback agreement work?

If you need to set up an escrow holdback, follow these steps.

1. Create an escrow holdback agreement

The buyer and the seller need to determine what repairs are necessary and who will pay for them. Work with your agent to negotiate the terms and then submit an addendum to your real estate purchase agreement.

Details to negotiate and get in writing include:

• What repairs must be done
• The cost of those repairs
• The payment schedule for any contractors used
• How and when will money be disbursed
• Deadlines for completion of the repairs

2. Signing and submitting the agreement

Escrow holdbacks are used to pay for repairs that affect the safety, usefulness, and value of a home. The mortgage lender will want to approve a copy of the agreement before funding your mortgage. After all, a damaged home likely may not be worth enough to secure the mortgage. If the lender approves the agreement, it will set up the escrow account either on its own or by working with the title company.

3. Paying for and making repairs

Because the seller owned the property when it was damaged, it’s usually the seller who deposits the money into the escrow holdback account. The funds can come from the seller’s savings or from the money they make from selling the home.

The amount that the seller needs to provide will depend on the buyer’s lender and the estimated cost of repairs. Rocket requires that escrow holdback accounts be funded with 120% of the cost of repairs. That means that if it’d cost $50,000 to fix the damage, the escrow holdback must be at least $60,000. Lenders also set a timeline, usually a few months, for completing the repairs.

4. Verifying the repairs

The final step in the escrow holdback process is inspecting the repairs to confirm that all the work was done correctly. Once the inspection is complete, the money from the escrow account is released to the buyer.

This motivates both the buyer and seller to ensure the work is done promptly and properly because there’s a lot of money tied up in the account. The buyer gets reimbursed for the cost of repairs only after they’re done, and the seller receives any leftover cash.

Read your agreement with your lender carefully, because some lenders include a penalty for improperly done repairs.

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 (or permissible). But, believe it or not, there may be other parties involved in the mortgage process besides your lender. If your original lender plans to sell your mortgage to a government-sponsored entity (GSE) after closing, they must comply with that GSE’s rules regarding property appraisals and repairs.

FHA and VA loans

The Department of Housing and Urban Development (HUD) helps home buyers via the Federal Housing Administration (FHA) loan program. The program has its own rules regarding escrow holdbacks. For example, if you apply for an FHA loan, the property can’t require more than $5,000 worth of repairs. If the repair estimate exceeds that amount, you can’t do an FHA escrow holdback. However, you may qualify for a 203(k) FHA rehabilitation loan to fix the home. Note that 203(k) loans are not offered by Rocket Mortgage.

VA loans are guaranteed by the Department of Veterans Affairs. The guidelines for a VA loan escrow holdback are similar to those of an FHA loan. However, with a VA loan, you’ll need to put up 150% of the cost of repairs.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are GSEs that purchase mortgages from other lenders after the loans close. Their goal is to help private lenders stay liquid so they can afford to lend to more home buyers. These two GSEs only purchase loans that are conforming.

Let’s take a quick look at the difference between conforming and nonconforming loans. Conforming, or conventional, loans meet all of the Fannie Mae and Freddie Mac standards – including loan amount limits and credit score requirements. Conforming loans can’t exceed $806,500 in most areas ($1,209,750 in regions with a high cost of living) in 2025. Plus, borrowers need to have a credit score of 620 or better.

Nonconforming loans don’t meet Fannie Mae and Freddie Mac’s standards. An example of a nonconforming loan is a jumbo loan, which exceeds the limits stated above. Government-backed mortgages, like FHA loans, are also nonconforming due to their lower credit score requirements and other factors.

If your original lender plans to sell your mortgage to Fannie Mae or Freddie Mac, they need to know how the GSEs handle escrow holdbacks. For example, if the repairs aren’t structural, Fannie Mae will purchase the loan before the home gets fixed. However, if the repairs are structural, the original lender must prove that the property was fixed before selling your mortgage.

Rocket Mortgage requires that you repair anything structural or that could impact safety before closing.

State law

Sometimes, the state you live in can cause delays to the home buying process. That’s because every state has its own regulations regarding property appraisals. For example, many states say that every septic tank needs to be inspected and approved for the property to pass its inspection.

Geographic considerations

The region of the country you live in can also have an impact on your closing date. Each area has its own unique concerns that often get factored into the appraisal process. For example, in the South, termite inspections are very common.

Lenders’ internal rules

Your lender may have higher expectations than the federal government or your state. That means they could impose stricter repair conditions on your real estate deal. It’s a good idea to ask your prospective lender about their requirements before making an offer on a property or refinancing.

FAQ

Here are answers to common questions about escrow holdbacks.

Who funds the escrow holdback?

In general, the seller funds an escrow holdback. In some cases, the seller can fund it using money they receive from selling the home.

What is the average escrow holdback amount?

Each lender sets its own rules and requirements for how much money must be placed in the escrow holdback account. The amount is based on the estimated cost of repairs and is usually 1.5 times the estimated repair costs.

What happens if the repair doesn’t qualify?

If a needed repair doesn’t qualify for an escrow holdback, it can delay closing or cause the lender to reconsider the loan. As a buyer, you may be tempted to pay for the repairs to close on schedule, but keep in mind that you don’t own the home until you close on the loan. If the sale falls through, you’ll have paid for repairs to someone else’s home with nothing to show for it.

What issues can arise with escrow holdbacks?

Using an escrow holdback isn’t without risks. For one, you’re buying a home that needs repairs, which always comes with risks that there could be deeper issues you haven’t identified. Repairs may cost more or take longer than expected. Also, your lender might not approve the holdback.

How are escrow holdbacks released?

Generally, once an inspector verifies that the repairs needed are complete, the money from the escrow holdback is released according to the details of the agreement. Usually, that means the buyer is reimbursed for any repairs they paid for, and the seller gets back any money not used for repairs.

The bottom line: An escrow holdback can help keep your closing date on the calendar

An escrow holdback sets money aside for repairs to a home that you are in the process of buying or refinancing. They can be helpful to prevent delays in the closing process, but keep in mind that they can only be used for some repairs and with lender approval.

If you’re in the market to buy a home, it’s important to understand the complex but incredibly important process that is closing on a home. Check out Rocket’s guide to closing to make sure you know how it works.