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.

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.

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.

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.

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.

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 $726,200 in most areas ($1,089,300 in regions with a high cost of living). 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.

If your closing date is in jeopardy due to required home repairs, consider asking your lender for an escrow holdback. If approved, it could keep your real estate transaction on schedule and incentivize you or the seller to complete the repairs fast. Your lender can help guide you through the escrow holdback process.

Be sure to check out the Rocket Mortgage Learning Center for more great articles about the home buying process and how long it can take to close on a house.