Quick answer: An escrow hold is when the lender temporarily withholds a portion of the seller’s proceeds after closing to cover necessary repairs or unfinished work. Once the repairs are completed, inspected, and approved, the remaining funds are released back to the seller.
An escrow hold is a financial agreement, approved and supervised by the lender, that allows the sale of the home to proceed. It involves setting aside a portion of the seller’s proceeds to cover unfinished repairs or improvements after closing. This security is enforced by the lender to ensure that the property meets safety, occupancy, or balancing standards. When the transaction is completed and confirmed, any remaining funds are returned to the seller.
That you are selling a house Memphis, TN, Columbus, OHor Temecula, CA understanding how escrow holdbacks work can give you peace of mind and help you close on time. This Redfin guide will explain what an escrow holdback is, why it’s important to sellers, and how you can prepare yourself if it occurs in your business.
What is an escrow hold?
An escrow hold is when a portion of the seller’s proceeds are temporarily held at closing and placed in an escrow account to pay for lender-required repairs or improvements that cannot be completed before closing. In some cases, the fees are taken directly from the seller’s income; in others, they may be deposited into a separate account. Once the required work is completed and verified to meet the borrower’s needs, the funds are released.
>> Read: How Does Escrow Work When Selling a Home?
What causes an escrow hold?
There are several reasons a lender may require an escrow hold. Understanding these reasons can help sellers anticipate and prepare for potential delays. Here are some common causes:
- Test findings: Safety or life issues flagged by the analyst to be addressed.
- Test preparation: Problems with the foundation, roof, or other critical systems that must be resolved before the home is fully occupied.
- Weather dependent activity: Seasonal projects such as painting, landscaping, or outdoor maintenance that cannot be completed in the winter.
- Construction or repair delays: New buildings or remodeling that is not fully completed by closing.
- Permit or title requirements: Outstanding permits, septic certificates, or legal documents that must be completed.
Who decides when an escrow hold is required?
The lender determines whether an escrow hold is required, as it relates to the buyer’s finances. Even if the seller and buyer agree that repairs can be made after closing, the lender must approve the arrangement for the sale to proceed. If the lender does not approve or if the renovation does not meet their criteria, the transaction may be delayed until the transaction is completed.
What this would look like in practice:
In Minnesota, a real estate agent received an appraisal in December that required exterior painting. Since the work could not be done during the winter, the lender authorized the holding of the escrow. Funds were held at the closing to assemble the painting, and when the work was completed in the spring and finally passed to testthe balance was released and returned to the seller.
What sellers can expect during the escrow process
To better understand the process of holding escrow as a seller, it’s important to look at each key step and see how the seller’s role fits in.
1. Issues identified and agreement reached
If the inspection or inspection reveals the necessary repairs, the buyer and seller agree on the work and the escrow amount, which is written in the addendum to the purchase contract.
3. The lender reviews and approves the escrow agreement
The lender reviews the proposed escrow agreement to ensure it meets their requirements and approves the arrangement.
4. Seller’s fees are withheld at closing
At closing, typically 100–120% of the estimated repair costs, is deducted from the seller’s proceeds and deposited into the settlement account.
5. Repairs are completed after closing
After the closing of the sale, the seller is responsible for completing the agreed repairs or improvements within the stipulated time.
6. The final inspection takes place and the funds are released to the seller
Once the renovation is complete, a final inspection is performed to ensure that the work meets the lender’s specific standards. After the inspection is approved, the escrow agent is authorized to release the remaining funds to the seller.
To make sure this last section doesn’t stop, Elliot J. Danziger of Company Danziger Legal PLLC recommends explaining the exit strategy in advance, “The most important detail for the seller in the escrow agreement is a clear procedure for releasing the funds when the repairs are completed. The agreement should state what evidence is required and include a strict response deadline, so that the escrow is held indefinitely if the buyer does not object after receiving confirmation that the work has been completed.”
>> Read: What is Escrow? A Clear Guide to the Escrow Process
Pros and cons of holding escrow for sellers
While sellers do not always have control over whether an escrow holdback is used, since lenders may require one to approve financing, it is still important to understand the benefits and drawbacks.
Benefits of holding back escrow
- Keeps sales on schedule: Allows transactions to be closed on time despite pending repairs, to prevent delays that could jeopardize the deal.
- Helps protect the contract: It assures the buyer, reducing the risk of cancellation or financial problems.
- Preparing for lender approval: Ensures that the borrower’s requirements are met, allowing the buyer’s financing to proceed.
Disadvantages of holding back escrow
According to Michael R. Nerenberg, Esq., Senior Partner at Borah, Goldstein, Altschuler, Nahins & Goidel, PCThe most important risk for the seller is not only the delay, but the potential for open costs
“Big Satellite fails to include language that ensures the escrow amount is the end of the seller’s liability – ie if the cost of the action/repairs subject to escrow exceeds the escrow amount, the seller is not responsible for the difference. The result is undisclosed liability after the seller closes.”
Beyond this “blindspot” liability, sellers should consider these pitfalls:
- The money is temporarily withheld: A portion of your funds are locked up at closing, which may disrupt your financial plans for your next move.
- Creditor restrictions: Some loan programs have strict limits maintenance costs or it may not allow capture at all, complicating the timeline.
- The dangers of time: If the repairs are not completed by the agreed deadline, you risk losing the deposit or face buyer disputes.
- A continuing obligation: Even after you’re out, you’re still responsible for coordinating contractors and making sure the job passes inspection.
How loan types affect escrow holdings
The escrow holdback allowance and amount depends on the buyer home loan system, which affects the seller’s reserves and conditions at closing. Loan guidelines can change, so confirm details with the lender in advance.
- Conventional loans – more flexibility: Conventional loans often allow flexible escrow holdings, with lenders having more discretion in the types of adjustments and fewer hard limits.
- FHA loan – $5,000 cap: Federal Housing Administration loans limit the deduction to a maximum of $5,000. If repairs exceed this amount, FHA withholding is probably not an option.
- VA loan – A big pillow is needed: VA loans typically require an escrow hold of 150% of the estimated repair cost, temporarily holding back a large portion of the seller’s profit.
>> Read: Types of mortgages
Tips for sellers navigating escrow
If you’re dealing with being held back, here’s how to deal with it with a few tricks:
- Get multiple repair rates: Secure 2-3 detailed estimates from qualified contractors to ensure the escrow amount is realistic.
- Write the details: Ensure that the addendum clearly defines the scope, timeline, and evaluation requirements of the fund release.
- Ensure lender approval in advance: Make sure that a particular consumer loan program allows deductions before you get to the closing table.
- Stay engaged after closing: You are always responsible for overseeing the quality and facilitating the final inspection to initiate your payment.
The key is to avoid procrastination
Paperwork is often where sellers run into trouble. Bryan S. Malickson, Esquire, Marketing Manager at Mid-Atlantic Residential Servicesnotes that the unclear agreement is the main reason that currencies remain unchanged.
“The most common reason that escrow funds get ‘stuck,’ or delayed, is because the parties fail to enter into a clear Escrow Agreement that sets out specific terms for the money to be released by the owner. It is released without a problem.”
Frequently Asked Questions: Escrow Withholding
1. Who pays the escrow holdback?
Typically, the seller pays an escrow deduction from their sales at closing to cover repairs or necessary work. However, arrangements can vary based on the agreement of the buyer, seller, and lender.
2. How long does escrow hold?
Lenders generally require repairs to be completed within 30-180 days of closing, although some projects (eg, weather-related, major repairs) may be granted extensions.
3. What happens if the repair costs more than estimated?
Escrow accounts usually include a cushion to cover unexpected overruns. If the cost still exceeds that cushion, the seller is usually responsible for covering the difference out of pocket.
4. Can the remaining escrow funds go back to the seller?
Yes. If the renovation is completed under budget and the borrower’s requirements are met, any unused funds are returned to the seller when the escrow account is closed.
5. Is escrow holding required?
Although an escrow hold is not required for all real estate transactions, lenders may require an escrow hold as a condition of obtaining financing. If so, both buyer and seller must agree to it for the auction to close, making it a necessary condition of the transaction.
