How Repair Escrows Work & When to Use ThemÂ
A repair escrow offers a straightforward solution for handling repairs that come up during a home sale. Keep reading to discover how it can simplify the process and provide protection and peace of mind for all parties involved.
What Is a Repair Escrow?
Set aside funds for necessary home repairs
A repair escrow is a dedicated account where funds are deposited to cover home repairs that are discovered during inspection or at any point before the sale is finalized.
Money is held by a third party until repairs are complete
A third-party escrow service manages the account and releases the money only when the repairs have been verified complete.
Ensure work is done correctly and on time
The escrow process gives buyers confidence that all repairs will be done to code and finished on time. It also gives providers security in their payment.
What Can a Repair Escrow Be Used For?
Major repairs
Repair escrows are used to cover major repairs found before closing, like hidden plumbing, roofing, or foundation issues.
Livability concerns
This program also covers repairs that affect the livability of the home, like fixing a broken HVAC system or replacing a leaky gas stove.
Some cosmetic repairs
In some cases, repair escrows can be used for cosmetic repairs that bring a home up to standard. This might include replacing cracked windows or upgrading landscaping features to prevent flooding.
Pros
- Convenient for sellers
- Reduces financial risk for buyersÂ
- Incentivizes timely repairs
- Prevents post-closing disputes
Cons
- Not all repairs are covered
- Seller chooses which contractors to use
- Potential for overestimated repair costs
- Not all lenders will allow for repair escrows Â
Talk to our mortgage experts today about finding the right loan for you.
Repair Escrow Alternatives
- Insured by the Federal Housing Administration (FHA)
- Can include renovation costs in the loan
- Can be used for structural and non-structural repairsÂ
- Must be used for the borrower's primary residence
- Wide range of eligible repairs
- Attractive down payment optionsÂ
- Can be used for second homes or investment properties
- Can be used to make energy-efficient upgradesÂ
- Secured by the equity in your current home
- Functions like a credit card with a revolving balance
- Make interest-only payments during the draw periodÂ
- Funds can be used for any purpose Â
How Do I Know If a Repair Escrow Is Right for Me?
You need to negotiate repairs with a seller
When repairs are part of the negotiation process, an escrow allows both parties to reach an agreement on how repairs will be funded and completed without delaying the sale.
You don’t want to take out a second loan for repairs
Instead of having to secure secondary financing to cover repairs after the sale, an escrow lets you roll the cost of repairs into your primary mortgage.
You want to make sure repairs are completed before move-in
Repair escrows also make sure that all work is completed and verified before you officially take possession of the home.
When Is the Best Time to Use a Repair Escrow?
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FAQ
What can’t I use a repair escrow for?
- Painting
- Decorating
- Upgrading appliances
- Regular home maintenance
- Repairs to surrounding land
- Other non-essential improvementsÂ
How are completed repairs verified before escrow funds are released?
Once all repairs have been completed, the buyer or their agent will inspect the work to make sure it meets previously agreed-upon standards. Only after the work has been verified will the money being held in the escrow account be released to the service provider.Â
Can I use a repair escrow for repairs to a newly built home?
A repair escrow is typically used for older homes or properties with issues found during an inspection. For newly built homes, builders generally handle any necessary repairs through a warranty. However, if issues arise after closing, a repair escrow might be an option in some cases.
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