An escrow holdback is a valuable tool for home sellers, allowing them to close a sale on time and with minimal delays. This process sets aside a portion of the seller’s proceeds to cover any necessary repairs after the closing. In this guide, we will discuss how escrow holdbacks work, lender rules, pros and cons, and what sellers should expect during the process.
How Does an Escrow Holdback Work?
An escrow holdback is an agreement between the buyer and seller, with the help of their real estate agents and lender, to set aside a specific amount of money from the proceeds of the sale. This money is then held in an escrow account by a neutral third party until the necessary repairs or improvements are completed after the closing.
In most cases, the buyer will conduct a home inspection before closing to identify any repairs that need to be addressed. If any major issues are discovered, the buyer may request an escrow holdback to ensure that the repairs are completed to their satisfaction. The agreed-upon amount is then included in the final terms of the sale.
Lender Rules for Escrow Holdbacks
Lenders have their own rules and guidelines when it comes to escrow holdbacks. In most cases, the lender will only agree to an escrow holdback if the repairs are necessary for the safety or habitability of the property. They may also impose a cap on the amount that can be held back or require proof of funds to cover any unexpected expenses.
It’s important to work closely with your lender and real estate agent to understand their specific guidelines and ensure that all requirements are met for the escrow holdback to be approved.
Pros and Cons of Using an Escrow Holdback
One of the main benefits of using an escrow holdback is that it allows the sale to close on time. Without this agreement in place, the buyer may back out of the sale if they are not satisfied with the condition of the property. An escrow holdback also provides peace of mind for both parties, as the buyer knows that necessary repairs will be completed and the seller can move on with the sale without taking on additional expenses.
On the other hand, there are also some potential downsides to consider. First, the seller will not receive the full proceeds from the sale until the repairs are completed and the escrow holdback is released. This could cause financial strain, especially if the seller is relying on the proceeds to purchase a new home. Additionally, if the repairs end up costing more than the agreed-upon amount, the seller may be responsible for covering the extra expenses.
What to Expect During the Escrow Holdback Process
If you and the buyer agree to an escrow holdback, there are a few steps that need to be followed before the sale can close. First, the buyer’s lender must agree to the holdback and specify their guidelines. Then, the escrow company will create an escrow agreement outlining the terms and conditions of the holdback. Both parties will need to review and sign this agreement.
The escrow holdback amount will then be deducted from the seller’s proceeds before the closing and held in an escrow account. Once the repairs are completed and approved by the buyer, the holdback amount will be released to cover the expenses. If there are any funds remaining after the repairs are completed, they will be released to the seller.
In Conclusion
An escrow holdback can be a useful tool in a real estate transaction, allowing the sale to close on time and ensuring that necessary repairs are completed. However, it’s essential to fully understand the implications and potential risks involved before agreeing to an escrow holdback. We recommend working closely with your real estate agent and lender to determine if this option is right for you and to ensure a smooth escrow holdback process.
