You’re purchasing a new home, and right before you’re supposed to close, you find out something on the property needs to be fixed. Now your closing date is pushed back. Sound familiar? It happens more often than you might think. Oftentimes, after an appraisal, repairs need to be done before the close date. But what happens if you need to close sooner? You could push the closing date until the repairs are finished, or you could use an escrow holdback.
What Is An Escrow Holdback?
An escrow holdback is money set aside at the closing of a home that will be refunded once repairs are completed. Because a portion of the seller or buyer proceeds are held in an escrow account until the work has been finished, they’re given an incentive to actually finish the work. Typically, the holdback amount would be more than the estimated cost of the work that needs to be completed, which further encourages the seller or buyer to finish the work on time.
How Does An Escrow Holdback Work?
Let’s say you’re about to close on your new home, but the week before, a tornado sweeps through the neighborhood, causing minor exterior damage with the property still safe and otherwise move-in ready. The seller may not have time or money to make repairs before closing. In that case, rather than delay closing, your lender might agree to an escrow holdback, which would involve holding back the money for repairs, plus an incentive premium. Once the repairs are completed, proof is shown to the lender, and a new appraisal is arranged.
What Is An Escrow Holdback Agreement?
An escrow holdback agreement is simply a written statement that explains what repairs are subject to the holdback, who will be responsible for the repairs and when the repairs must be completed. The FHA has its own form for these agreements, but they’re fairly standard legal documents that commit any agreement by the parties to writing.
What Is A Seller Credit For Repairs?
Even if the repairs weren’t caused by recent events, sellers sometimes don’t have the money to make necessary repairs. In those cases, to help move the sale forward, the parties might arrange for a seller credit for repairs, which works the same way as an escrow holdback, except that the credit is meant to cover the cost of the repairs being done by the buyer as opposed to the seller. As long as those repairs are required but not essential to the health and safety of the structure, lenders should be amenable to allowing this credit.
What Incentive Does An Escrow Holdback Create To Get Repairs Done?
An escrow holdback ensures the seller or buyer will make the necessary changes, because only once the changes have been made will the seller or buyer recoup their money. At Rocket MortgageⓇ, 120% of the bids or estimates for the repairs that need to be done are held, with a maximum holdback amount of 15% of the as-completed value.
What If The Seller Refuses To Make Required Repairs?
If the seller can’t or won’t make the repairs, the buyers can either walk away from the sale or choose to make the repairs themselves. If they choose to move forward, they may have to agree to a buyer’s credit for repairs, in which case they will have to show proof of repair to get their credit released. The lender may send a contractor out to get the job done.
What Types Of Repairs Can An Escrow Holdback Cover?
An escrow holdback can be used for exterior repairs required by an appraiser. If you’re applying for a conventional loan, the appraiser will mostly be concerned with documenting that current market conditions support the price you’ve agreed to pay for the home. This protects the lender should it be forced to sell to recoup its losses if you default on your loan.
Typically, repairs to the driveway, deck, fence, landscaping, porch or sprinkler system are eligible for an escrow holdback. Lawn seeding and pest treatment also qualify. Interior work and repairs affecting the health, safety and livability of the property are ineligible and must be completed prior to close.
What Is The FHA’s Policy Toward Escrow Holdbacks?
An FHA appraisal is different from a conventional loan appraisal. The FHA is even more interested in making sure that the home meets basic health and safety standards. Repairs subject to an escrow holdback can’t go toward making the home habitable. For repairs required to make the home livable, the FHA offers 203(k) Rehabilitation Loans. Rocket Mortgage doesn’t offer FHA 203(k) loans at this time.
What Is A Repair Escrow On An FHA Mortgage?
If you choose to go the FHA 203(k) route, your lender will require a repair escrow that monitors all needed repairs and makes payments when the repairs are completed and inspected.
How Long Do Buyers And Sellers Have To Make Repairs?
At Quicken LoansⓇ, it is our policy to require that repairs must be completed within 180 days of closing. Remember that once your mortgage is originated at closing, it is usually quickly sold to a government-sponsored enterprise like Fannie Mae or Freddie Mac for repackaging on the secondary mortgage market. Because of this, lenders must comply with their rules regarding mortgage sales, and a longer repair period would violate those rules.
What If I Need An Escrow Holdback For New Construction?
Most escrow holdbacks arise in the context of new construction. If your new home’s interior is ready for move-in day, but the lot needs landscaping or other work that hasn’t been completed (perhaps because the weather hasn’t cooperated), you can generally close and then have the contractor complete the work when it is feasible to do so.
Escrow Holdback: An Example
Let’s look at an example.
You’re in the process of purchasing a home. It’s not perfect, but it’s everything you want. The FHA has strict appraisal guidelines, and shortly before your home loan is supposed to close, you find out you can’t close until the seller fixes the cracks in the driveway. You don’t mind the cracks, but the FHA does. The repairs will cost around $1,000.
If your loan is through Rocket Mortgage, you could be eligible for an escrow holdback. We will hold in escrow funds from the closing of the home that will be refunded once the repairs are complete. Typically, 120% of the bids or estimates are held (in this case, $1,500) to give sellers an even greater incentive to get the repairs done on time.
On most occasions, the seller is providing the funds. If the repairs end up costing more than originally anticipated, the buyer will be responsible for the extra expenses. After an appraisal is completed, the funds will be returned to their original owner.
The Bottom Line: An Escrow Holdback May Keep Your Closing Date On The Calendar
Escrow holdbacks happen more often than you might think. You don’t have to push back the loan closing until all repairs are finished. You have options that will likely allow you to keep your closing date and still get the necessary repairs done. If you’ve found yourself in a similar situation, contact a Home Loan Expert to discuss your options today.
Or, read more about closing issues as a next step in our Learning Center.
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