Lenders are sometimes asked by a mortgage borrower to allow an escrow account to be created for some items to be completed. Repairs cannot be addressed by putting money in escrow. Repairs are usually required to be completed prior to closing. However, lenders may allow an escrow account to be created for items unable to be completed due to weather. Weather related delays are most common in new construction homes.
In my 3.5 decades in the mortgage business, I don’t recall a lender I have worked for ever allowing repair escrows. That is because they are typically messy, and many times end up not being resolved in a timely fashion. There are contractor problems and other situations where the cost exceeds the escrow account reserve. Weather related escrows are a different story, but repair related escrows may be impossible to get approved by a lender.
Examples of weather related items that a lender may allow an escrow account for:
- Installation of sod
- Pouring a concrete driveway
- Exterior paint
Conventional Conforming Loans
Fannie Mae has established guidelines for escrows related to repairs or completion items for escrow accounts. However, your lender may have their own guidelines that do not follow the Fannie Mae guidelines, so always check with your lender about setting up an escrow account.
Some of the highlights of the Fannie Mae requirements are:
- Items that need completing cannot be structural in nature.
- The escrow account must be a custodial account, typically held by the title company closing the loan.
- 120% of the amount estimated to be needed to complete the work is required to be held in the escrow account (although I have seen lenders require 150% – 200%).
- The escrow account is typically funded by the seller or builder.
- There are also requirements listed in the escrow agreement that will limit how much time is allowed to complete the work.
Jumbo loans are loans that do not follow the same guidelines as Conforming loans. Conforming loans must use the guidelines of Fannie Mae and Freddie Mac. As a result, if you have a Jumbo loan the escrow requirements may be different than what you are reading here, and in some cases may not be allowed at all.
FHA and VA Loans
FHA loans are backed by the Department of Housing and Urban Development (HUD). FHA loans have their own rules regarding escrow holdbacks. For example, FHA wants 120% of the cost of the work to be held in escrow. See “Repair Completion Escrow Requirement” on page 349 in the FHA manual by clicking here. There are also going to be requirements related to how much time FHA and the lender allow for completion of the work.
A sample FHA Escrow Holdback Agreement can be seen here on the HUD website.
VA loans are guaranteed by the Department of Veterans Affairs. VA may permit the escrow of funds necessary to complete the unfinished work later. The guidelines for a VA loan escrow holdback are similar to an FHA loan, however a VA loan will require 150% of the cost of repairs to be put in escrow.
See topic 10 on page 9-19 on the VA website by clicking here.
And a sample VA Escrow Agreement can be seen here on the VA website.