For a lender to agree to close on a house everything in the home buying process has to be finished. There are times when certain repairs are not completed before the closing date or maybe the seller hasn’t moved out. One option is an escrow holdback.
From finding the right house to negotiating the right price to getting a home loan, buying a home has been an exhausting back and forth process. Now you can see the end in sight. You couldn’t be happier to be closing.
You are ready to move in and the seller is ready to enjoy some well-deserved income. But there’s a problem. Some important repairs are yet to be done. Or the landscaping to your newly constructed home has not been completed.
You certainly can’t close on the house just yet. What you should do is request an escrow hold back.
Escrow Holdback Explained
Now unless you’ve bought or sold a house before, chances are you’ve never come across this important real estate term. Escrow holdback is simply an amount of money held in an escrow account owned by a neutral party such as a title company. The money in the holdback escrow account is taken from the seller’s portion of funds they would receive at closing.
An escrow holdback acts like an insurance policy. On the one hand, it assures the seller that the buyer is serious about the purchase and motivates him to finish up all necessary repairs. On the other hand, the buyer gets the money in the account should the home seller not complete repairs or overstays in the home.
Let’s take a look at a good example.
Say you’re buying a home for $300,000 and the home seller expects to get about $290,000 after commissions and closing costs. If everything goes according to plan, the seller will get his cool $290,000 and you get your keys.
In the event that the seller is unable to complete repairs that you agreed upon before the closing period or has not moved out of the house yet, you can request for an escrow holdback. In this case, an amount agreed upon by both you and the seller will be taken out of the $290,000 and placed in the escrow holdback account.
Once the repairs or move are complete you will then be asked to agree to release the money to the seller.
Most Common Reasons for an Escrow Holdback
Not all mortgage lenders will agree to holdbacks so you need to be fully aware of when you’re entitled to a holdback so that you can follow the right process and protect yourself from any kind of loss.
These are some of the most common situations where holdbacks are the best way out.
1. Home Repairs
This is the most common reason why most real estate transactions end up in escrow holdback. This happens if the home seller had agreed to make repairs or renovations after inspection but, come closing, the repairs have not been completed.
If the reason for the delay is genuine, then you can both agree to move the closing date. But say you have already scheduled your movers then delaying closing will be an inconvenience to you. Instead, have some money held in escrow until the work is completed.
2. Delayed Move Out
Another situation where the escrow holdback will occur is when for some reason the home seller has not completely moved out yet. In a home buying agreement where occupancy is given up upon closing the home buyer can move in once all paperwork has been signed.
If you have such an agreement and the home seller refuses or is unable to move out upon closing then your best bet is to go for an escrow hold back.
3. New Construction Holdbacks
If you’re buying a new construction home you may find yourself in an escrow holdback situation. It’s very common for builders to agree to a certain closing date but unavoidable circumstances delay the progress.
In some cases, builders are able to get an occupancy permit allowing home buyers to still move into the house without it being completely finished. However, there could be work that needs to be done and while you want to just trust your builder when they say it will get done, you’re better off holding back some money in escrow.
4. Septic System Holdbacks
Another common escrow holdback in real estate transactions is for the completion of a septic system. Many states require that a septic system must be inspected before closing. This is referred to as a Title V septic inspection.
Unfortunately, a home seller may fail the inspection requiring them to replace the septic system. That’s really no problem for the home buyer. As for the seller, it’s hell on earth. Septic systems are very expensive to replace.
Most sellers who fail the inspection prefer to put money in escrow for it to avoid delaying the closing. Normally, lenders will always require a seller to hold back a minimum of 1.5 times the actual cost of replacement. This ensures that any overruns are completely covered.
5. USDA Rehab Loans
Are you considering the USDA Rehab Loan program after struggling to get financing elsewhere? Then be ready for an escrow hold back.
The property you want to get must be repaired as a condition of getting the USDA loan. Don’t worry though about financing the repairs. The program allows you to borrow 100% of the home’s purchase price and an extra 2% of the home’s value for repairs.
A Clever Partner Agent will walk you through the process.
Talk to Your Mortgage Lender About an Escrow Holdback
If you are like most home buyers, chances are you are getting some assistance from a lender to purchase your new home. The fact that you are already cleared for a mortgage means you are past this huge hurdle to home buying.
If you truly believe that an escrow holdback is absolutely necessary, talk to your lender immediately. Your lender has to agree to the holdback. It’s not automatic.
The lender will also put some conditions to allow the escrow holdback. The conditions normally include:
- Inspection on the new work that has yet to be completed.
- Inspection of the work when it is finally done.
- If the new work is not up to standard, the lender may not release the escrow funds to the seller.
- Most lenders will require the escrow amount to exceed the value of the work to be done.
If your lender does not allow your request for an escrow holdback, there is not much you can do other than push back the closing date. You will have to decide if it is worth it to wait or if you should try to buy another home.
Consider a Post-Close Escrow Holdback
Postponing the closing date is the last resort for both parties involved. So much time and effort have been spent and both the seller and the buyer can’t wait to be done with the home buying process.
Delays are unfortunately inevitable. A seller who finds themselves in a situation where the closing needs to be pushed can remedy the situation by requesting a post-close holdback.
In a post-close holdback, the escrow holder retains an amount agreed upon by the buyer and seller to allow the house to close with repairs pending. This allows the seller to fund the repairs using proceeds from the sale. Once the work is done, the seller gets the money in the escrow account then the close of escrow follows.
Work With A Real Estate Agent
The escrow holdback process may seem daunting so get help if you need to. There’s no one better to help you out than an experienced real estate agent.
You can rely on their expert guidance to help you find you the perfect home — that might not even require the escrow holdback — making the closing process easier for you.
Clever Partner Agents are all top performers in their local market. Whatever stage you are at in the home buying process, they will guide you accordingly.