Mortgage 101

What Is an Escrow Holdback?

Published on: March 18, 2022

escrow holdback

An escrow holdback allows a real estate transaction to close even if repairs or renovations are incomplete. At closing, a portion of the seller’s funds is held back and used to establish a repair escrow account to cover the cost of the improvements. Buyers, sellers, and lenders may agree to an escrow holdback to avoid pushing back the closing date.

Lenders allow such a transaction to proceed only when specific conditions are present. Learn more about how an escrow holdback agreement works and how it can help avoid closing delays

What is an escrow holdback agreement?

Escrow holdback agreements — also called repair escrow agreements — exist when a seller cannot complete repairs or alterations on a home before the scheduled closing date. Rather than pushing back the closing, the buyer, seller, and lender agree to an escrow holdback.

In most cases, it’s the seller’s responsibility to complete the repairs, so at closing, the buyer’s lender or the closing agent holds back a portion of the seller’s proceeds from the sale and uses it to establish a repair escrow account. The escrow holdback agreement spells out what repairs are incomplete, their estimated cost, and the timeline for finishing them.

Escrow holdback agreements can benefit the buyer, seller, and lender as they allow a home to close on time and establish a plan to complete the repairs. In most cases, a valid reason for the repair delay must be present — for example, weather-related issues or other circumstances beyond the seller’s control.

How does an escrow holdback work?

When an escrow holdback is needed, the buyer and seller establish the terms for completing the delayed repairs and execute an agreement that the lender reviews. If approved, the escrow holdback agreement becomes a part of the purchase contract and closing disclosure.

What’s included in an escrow holdback agreement?

While the terms of escrow holdbacks vary by lender and loan program, escrow holdback agreements typically specify the following terms:

  • The estimated cost of repairs
  • Who is responsible for completing the repairs
  • The amount the lender or closing agent will hold in escrow
  • The deadline for completing the repairs
  • Who manages the repair escrow funds, and how they will disburse the funds
  • What happens if the cost of repairs exceeds or comes under the escrow holdback
  • Who verifies the completion of repairs and how

What qualifies for an escrow holdback agreement?

Lenders are not required to approve an escrow holdback. The following conditions typically need to be met:

  • A valid reason for the repair delay must be present
  • The home must be in a livable condition without the repairs
  • Repairs may be subject to a cost limit
  • The type of repairs allowed may be limited
  • The escrow holdback usually must exceed the cost of the repairs by a specific percentage
  • Repairs must be completed within a particular timeframe

How an escrow holdback agreement works: A timeline

Initiating the escrow holdback agreement –>  Approving the escrow holdback agreement –>  Closing the loan –>  Completing the repairs  

 

Initiating the escrow holdback agreement  
  • The buyer and seller agree to the terms of the repair escrow agreement and submit it to the borrower’s lender. 
Approving the escrow holdback 
  • The lender reviews the terms. If approved, the escrow holdback agreement and related forms become a part of the purchase contract and closing disclosures.  
Closing the loan 
  • The transaction closes as agreed. The closing agent or lender holds back a portion of the seller’s proceeds to establish the repair escrow.   
Completing the repairs  
  • The seller (or responsible party) completes the repairs. If established in the escrow holdback agreement, the lender or closing agent disburses funds from the repair escrow account to complete the repairs.  
  • The lender (or other identified party) must verify the completion of repairs.   

What might require an escrow holdback?

Various scenarios could lead to initiating a repair escrow agreement. Generally, a situation in which completing the outstanding repairs before closing is not possible must be present. Here are a few examples where a seller, buyer, and lender may agree to holding money in escrow for incomplete repairs rather than delay the closing:   

  • Unexpected last-minute repairs: For example, if a storm does damage in the days leading up to the closing.  
  • Walk-through issues: The buyer may discover problems during the final walk-through.   
  • Repair delays: The seller may not complete agreed-upon repairs on time due to issues beyond their control.  
  • Weather delays: Inclement weather may make it impossible to complete certain repairs. 
  • New construction delays: In some cases, new construction may be delayed due to the unavailability of materials or other circumstances. 

What types of repairs can be done with an escrow holdback? 

Lenders will only permit certain repairs to be completed with an escrow holdback agreement. In most cases, any repair or renovation that affects the livability and safety of the home will have to be completed before closing and can’t be done with an escrow holdback. 

Some repairs that may be completed after closing with a repair escrow agreement include:  

  • Exterior painting 
  • Landscaping  
  • Garage 
  • Walkways  
  • Driveways 
  • Retaining walls 
  • Flooring or carpet 
  • Minor plumbing leaks   
  • Cracked windows  

How to deal with escrow holdback issues 

In some cases, a buyer, seller, or lender may not agree to an escrow holdback, and the buyer and seller may wish to push back the closing date in such a scenario. Or, if the transaction includes an inspection or financing contingency or other contingencies that allow either party to terminate the contract, they may wish to exercise that right. 

How do lenders view escrow holdbacks?

Escrow holdback agreements can only take place when the situation warrants it. They do not exist merely to give a seller more time to complete repairs or to get a buyer in a home faster.  

Consequently, lenders and the agencies that guarantee loans have guidelines that determine when and if an escrow holdback can occur. These requirements include the type of repairs that can be delayed, the timeframe for completing repairs, and other conditions that must be present.   

Here’s a look at escrow holdback guidelines for some standard loan types, including conventional loans, FHA loans, and VA loans. 

For conventional (non-government loans), lenders may be subject to Freddie Mac and Fannie Mae escrow holdback guidelines. The two government-sponsored enterprises provide financing for most conventional loans. 

Conventional loan escrow holdback requirements 

  • Repairs must not affect the safety or structural integrity of the property 
  • A valid reason for the repair delay must exist (for example, inclement weather) 
  • Lenders must establish the amount to hold in escrow (in some cases, the amount must equal 120% of the estimated cost)  
  • Repairs must be completed in a timely manner (in some cases, within 180 days after closing) 
  • The repair cost may not exceed more than 10% of the as-completed appraised value  

 

For FHA loans, which are insured by the Federal Housing Administration (FHA), these are the escrow holdback requirements: 

FHA escrow holdback requirements  

  • Property must be habitable and safe for occupancy at the time of closing  
  • The escrow holdback must cover the estimated repair cost 
  • The lender must certify the completion of repairs 

 

And lastly, for VA loans guaranteed by the U.S. Department of Veterans Affairs and available to qualified military servicemembers, veterans, and eligible spouses, these requirements apply: 

VA escrow holdback requirements  

  • Property must be suitable for occupancy before the repairs 
  • The repair delay must be beyond the seller’s control  
  • The seller must complete repairs within a reasonable time after closing (typically within 90 to 120 days) 
  • The escrow holdback must be at least 150% of the estimated repair cost  

 

Keep in mind lenders may have additional escrow holdback requirements and guidelines depending on the property type and loan details. Connect with a local Finance of America Mortgage Advisor today to learn more about how a repair escrow agreement may affect your specific situation. 

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