Home in the final stages of construction

If repair work or unfinished construction prevents you from closing on schedule, an escrow holdback may be an appropriate solution. Escrow holdback is simply an amount of money held in an escrow account owned by a neutral party such as a title company. The title company takes a portion of the fund the seller would receive at closing and places it in the holdback escrow account.

How Escrow Holdback Works

An escrow holdback starts with an amendment to the real estate contract. The amendment details

  1. the work to be completed after closing
  2. the estimated cost
  3. the deadline for completion
  4. the escrow amount
  5. who will hold the funds
  6. what happens if the seller doesn’t finish the work on time
  7. how the buyer will verify the seller completed the work
  8. what happens if the seller doesn’t ever complete the work
  9. how the seller will prove payment of contractors and suppliers
  10. what happens once the work is complete and payment is verified

Finally, the amendment should contain a provision making it subject to the lender’s approval. If the lender doesn’t agree to the amendment, the seller will likely need to complete the work before the parties can close.

Amount To Holdback

Often, the lender will require that an escrow holdback’s account balance exceed the estimated repair costs. Conventional loans may require the escrow to exceed the estimate by 20% or more, while VA loans may require an additional 50%. A standard FHA loan limits the cost of the repairs to $5000, although there are FHA rehabilitation loans with higher limits.

The extra funds provide an additional incentive for the seller to complete the work. And, if the buyer gets left having to complete the job, there will be enough funds to cover the project should it go over budget.

Bottom Line

A buyer should consider an escrow holdback if their closing date is in jeopardy due to required repairs or incomplete work. First, the buyer (or their agent) should speak with the seller or builder to determine what work they will complete after closing, how much those items are estimated to cost, and when they can be completed.

The buyer (or their agent) should speak with the buyer’s lender about an escrow holdback with this information in hand. If the lender says they will allow the buyer to close before work is complete, then the lender may have an in-house escrow holdback agreement the buyer should use. Otherwise, the lender should provide answers to the questions above so the buyers’ agent has the information needed to draft an acceptable amendment.

What Is An Escrow Holdback, RocketMortgage