What Are Escrow Holdbacks and How Do They Work?
When purchasing a home, certain repairs or improvements might be needed before closing. But what happens when those repairs can’t be completed in time? This is where escrow holdbacks come into play.
What Is an Escrow Holdback?
An escrow holdback is a portion of funds set aside at closing to cover necessary repairs or improvements after the transaction is finalized. These funds are held in an escrow account and released once the work is completed to the lender’s satisfaction.
Escrow holdbacks are commonly used when:
- Repairs are delayed due to weather (such as exterior painting or roofing).
- Minor but required repairs need to be finished post-closing.
- Renovations impact loan approval but will be completed after closing.
Escrow Holdbacks on FHA and Conventional Loans
Different loan types have specific guidelines for escrow holdbacks:
- FHA Loans: Allow escrow holdbacks of up to $5,000 for necessary repairs.
- Conventional Loans: Allow escrow holdbacks of up to 10% of the as-completed value of the home.
This flexibility allows buyers to move forward with their home purchase without delaying closing while ensuring necessary improvements are completed in a timely manner.
How Do Escrow Holdbacks Work?
- A contractor provides a repair estimate.
- The lender approves the escrow holdback amount.
- Funds are set aside in escrow at closing.
- Repairs must typically be completed within a set timeframe (often 30-90 days).
- Once the work is verified, the funds are released to the contractor.
Why Use an Escrow Holdback?
Escrow holdbacks provide a solution for buyers and sellers who need to close on time despite minor outstanding repairs. They can help:
- Avoid delays in closing.
- Ensure necessary repairs are completed.
- Provide flexibility for weather-related or last-minute repairs.
If you’re purchasing a home and facing repair-related delays, an escrow holdback could be the perfect solution. Have questions? North Star Mortgage Network is here to help! Contact us to learn more about how escrow holdbacks work for your loan type.
