Sometimes, a buyer and seller are getting ready to go ahead with a real estate transaction, but they discover that the house needs repairs. If it’s not possible to have the work completed right away because of weather or another reason, an escrow holdback may be an option.
How Does an Escrow Holdback Work?
An escrow holdback is like an insurance policy for both the buyer and the lender so they can have confidence that repairs will be completed or that they will be compensated if work isn’t done. An escrow holdback may be an option if you’re planning to buy a house from a private seller or you’re purchasing a newly constructed house from a builder.
If the parties agree to an escrow holdback, money will be put aside in an escrow account to pay for repairs. In most cases, the seller will provide those funds. The amount of money put into escrow is usually more than the estimated cost of repairs. That is done to give the party responsible for repairs an incentive to get them completed on time.
After the repairs are finished, the money in the escrow account will be returned to the party who provided the funds. The buyer’s lender will most likely require an inspection to make sure the repairs are satisfactory before it will release the funds.
How Is an Escrow Holdback Negotiated?
A buyer may request an escrow holdback, or the buyer’s lender may require one if a home inspection reveals an issue that can jeopardize people’s health and safety. Under those circumstances, a lender may refuse to approve a mortgage unless it has a firm commitment that repairs will be made.
The buyer, seller and their agents can negotiate an addendum to the purchase contract that lays out the types of repairs to be performed, a deadline for the work to be completed and how contractors will be paid. The buyer’s lender will have to approve the agreement before the parties can go ahead with the closing.
What Should You Do If the House Can’t Be Fixed Before Closing?
If you learn that the home you want to buy needs repairs that can’t be completed prior to the closing date, get in touch with your lender right away to ask about its policy on escrow holdbacks. Some lenders will only approve an escrow holdback in specific situations and with certain types of properties and transactions. Some lenders won’t approve an escrow holdback under any circumstances. If your lender won’t agree to one, you and the seller may have to push back the closing date.
