When can a home buyer seek an escrow holdback (and what is it)?

On Behalf of | Apr 7, 2022 | Real Estate Law |

You’re just about ready to close on your new home. Then in your final walkthrough, you discover that the repairs the seller committed to making to the fence weren’t made. Maybe now that the patio furniture is packed up, you see missing bricks or other damage that was covered before.

There are a number of potentially costly issues that buyers can find after sellers have vacated their property but before the deal is closed. Typically, the seller is responsible for covering the costs. Unfortunately, they’re not always agreeable to that.

That’s where an escrow holdback can come in. It involves collecting additional money from the seller at closing and holding it in an escrow account until the needed repairs are made. Then the seller gets the money back. The amount is typically a bit above the estimated cost of repairs.

An escrow holdback (sometimes called “repair escrow”) can keep the transaction on track and the closing date on schedule. It’s also a good incentive for recalcitrant sellers to fulfill their obligation to make necessary or agreed-upon repairs.

The escrow holdback agreement is an addendum to the original purchase-sale agreement. Both the buyer and seller must sign it. If the seller doesn’t sign it, the deal doesn’t go through, which can be costly and inconvenient – particularly if they’ve already purchased a new home.

Who has to approve an escrow holdback?

Typically, escrow holdbacks are used when the repairs involve things that affect the value of the home and that the mortgage lender requires before they’ll make the funds for the purchase available.  The lender and the underwriter decide whether to allow an escrow holdback. 

If they don’t agree to one, the buyer and seller will need to negotiate the cost or the buyer will have to take legal action either to get the repair cost reimbursed or back out of the deal without serious financial repercussions.

If you’re getting a Federal Housing Administration (FHA) or another government loan, the agency that administers the loan will have its own rules about escrow holdbacks. For example, they may require that repairs have to rise to a certain minimum cost level.

If you run into issues that may require addenda to your purchase-sale agreement or that could have potentially costly ramifications as you near closing on your new home, it may be wise to seek legal guidance so that you understand your options.