Updated: Sep 12
Escrow Hold Back - is where a piece of real estate is purchased with money that the buyer or seller has put forward in escrow (from their own savings typically) until certain appraisal required (or wood destroying insect/moisture required, septic/well required, etc.) repairs that the seller is unwilling to complete have been done and that is then paid from escrow, usually within a few weeks of closing.
Why use an escrow holdback?
If a seller is unwilling to perform any repairs, such as those required by your lender from appraisal requirements, well water treatment, septic system repairs/replacement, or from termite damage, an escrow holdback is a viable option for buyers to be able to close on a loan for a home without using a reno loan that would involve more paperwork and typically an increased rate.
Compared to reno loans
With reno loans, they also have restrictions (which vary based on the kind of reno loan), and typically increase the rate. One of the positive aspects of using an escrow holdback over a reno loan, if you have the cash to do it, is that it shouldn’t result in a rate increase.
The main negative of an escrow holdback vs a reno loan is that you need to come out of pocket for the escrow holdback and that they tend to be more limited in amount.
Typically under $10k
Also these are typically less than $10k (though sometimes they can be more with special approval) whereas a reno loan can often have more than $10k in renovations, especially on a higher end property.
Amount Needed (50% Above Labor/Materials)
Typically the amount needed is around 50% higher cost than repair estimates (for materials & labor). That way, if the actual amount needed is more (i.e. if more termite damage is found while replacing termite damaged items), the bank is covered who is giving you a loan.
Some lenders don't do them.
Some lenders aren’t able to do escrow hold-backs at all. While some lenders allow them to be done by buyer or seller in certain circumstances, some may only allow them for sellers under certain circumstances.
Restrictions on what you can use them for
Like reno loans, there are often restrictions on what you can use an escrow holdback for. In some cases they also may be more limited in scope of what the possibilities are for repairs with an escrow holdback vs a renovation loan.
Some sellers will reject your offer even if an escrow holdback could work for a typical style loan.
Keep in mind though that some sellers, especially when not dealing with individuals, won’t care if you have an escrow holdback and could automatically ignore your offer if you are not using a reno-loan even if you state that you have escrow holdbacks as an option.