In this article, we will cover what escrow hold back is in the mortgage loan process. We will discuss escrow hold back mortgage guidelines for repairs. Nothing is worse than approaching your closing date and having issues arise. Many times, these can be worked through, and sometimes they cannot. Issues late in the process can cause a lot of stress for both the sellers and the buyers. Sometimes living arrangements need to be made when a closing date is missed. This can be incredibly costly.
Using an escrow hold back can save a deal in many situations. This is a confusing topic in the mortgage industry. Due to the fact that many lenders do not allow the use of escrow hold backs, it is important to understand when and when you cannot use this process. This blog will focus on situations when Gustan Cho Associates have used escrow hold backs. In the following sections, we will cover what escrow hold back is in the mortgage process for homebuyers and sellers.
What Is An Escrow Hold Back and How Does It Work
What are escrow hold backs? When we think of the term “escrow”, we think of an escrow account for our taxes and insurance payments. This is accurate, and an escrow hold back is similar. An escrow hold back will add money into an account that is set aside for a specific item for the seller to address at a later time.
The funds will be put aside to assure the work gets done, a form of an insurance policy for the buyer and lender. Funds are held by a third party like the title company. The title company officer releases the funds from the escrow account once the work has been completed and the lender approves the release.
Case Scenarios of Escrow Hold Back By Lenders Is Necessary
Examples of Escrow Hold backs:
- Newly Installed Systems (septic system)
- Renovations that still need to be completed
- Title Issues
- Clean-ups not yet completed
- Throwing out compost
- NEW CONSTRUCTION HOLD BACKS
Escrow Hold Bank For Large Ticket Items Like Septic Systems
Many times, in real estate transactions the completion of a septic system still needs to be completed. In most states, the septic system needs to be inspected and approved before closing. There are times when the septic system does not pass the inspection. This can put a hold on the closing. The sellers can agree to use an escrow hold back, or put money to repair the septic system in an account and continue with the closing.
This ensures the lender that the work will be completed before the buyer takes possession of the house. Typically, lenders will ask for more than one quote and put 150% of the higher quote into an escrow account at closing. This gives wiggle room and any overages will be distributed to the seller after work is completed. Inspection is been completed by the appraiser or inspector. NOW CLOSING IS COMPLETED, and more importantly, both parties are happy.
Escrow Hold Back Are Common on New Construction Homes
The most common use of an escrow hold back seems to be when buying a NEW CONSTRUCTION HOME. While the builder does have “time frames” they do not have “deadlines” More often than not, your closing will be delayed by the builder not finishing your home in the expected time frame. This may be due to weather, but no matter the reason, you cannot move into the new home.
When entering into a new construction contract, it is important to have a place to live while the home is being built. It is smart to have a backup plan if your home isn’t finished on time. This winter alone we have already had numerous escrow hold back situations arise. The most recent was the yard not being completed. Since it is winter, they cannot level and sod the yard. So technically, the house is not complete.
Landscaping Escrow Hold Back
Landscaping is one of the most common uses of a hold back. We simply put 150% of the cost of the Landscaping into an escrow account to be completed once spring hits and the weather warms up. Driveways are another very common hold back. Weather permitting, there are times they cannot be completed until the ground thaws.
Escrow Hold Back Guidelines on Loan Programs
Each loan program does have specific guidelines on escrow hold backs. For example; for a new construction property the cost of improvement cannot exceed 2% of the appraised value. At that point, there is just too much risk and will need to be completed before closing. So, if the home is $300,000, any escrow hold back needs to be for $6,000 or less. See below:
- Conventional and FHA= within 180 days from closing
- VA=90-120 days
Are There Caps on Escrow Hold Backs?
Below are the caps on escrow hold backs:
- Fannie Mae= 10% of the appraised value
- Freddie Mac= 15% of the appraised value
- FHA= $5,000
- VA= does not specify a max total amount
- USDA= 10% of the final loan amount
- Since we do not have any lender overlays, we are able to use escrow hold backs to save your deal
- We must follow the guidelines for your specific loan program
- But we are able to do so on all Conventional, FHA, VA, and USDA mortgages
- Gustan Cho Associates are available 7 days a week to answer your mortgage questions
- Call or text Mike Gracz on 630-659-7644 or text us for faster response
- Or send an email to email@example.com with your questions
Gustan Cho Associates is one of the very national mortgage companies with no overlays on government and conventional loans that offer escrow hold backs for repairs. Our team of licensed and support personnel is available 7 days a week, evenings, weekends, and holidays.
December 15, 2022 - 4 min read