When purchasing a home with an FHA loan, you might encounter minor repairs identified during the appraisal that must be addressed before closing to meet FHA Minimum Property Standards. An FHA escrow holdback allows the homebuyer to proceed with closing despite these minor issues by placing funds equivalent to 150% of the repair cost into an escrow account managed by the lender. This holds the money until repairs are completed, typically within 30 to 90 days.
The process begins with the appraiser identifying needed minor repairs such as peeling paint, defective handrails, or leaking faucets—issues that do not compromise the home’s safety or structure. The buyer obtains a licensed contractor’s detailed bid for the repairs, which the lender reviews to calculate the holdback amount.
At closing, the holdback funds—often sourced from either the seller’s proceeds or loan funds—are secured in escrow. The homeowner then completes the repairs by the deadline. Afterward, an inspector confirms satisfactory completion before the lender releases the escrowed funds to the contractor or reimburses the buyer if they paid upfront.
Eligible repairs typically include fixing broken windows, minor plumbing leaks, repainting to address peeling paint (especially for houses built before 1978 due to lead paint concerns), replacing missing handrails, repairing gutters, or installing smoke detectors. Major structural repairs, extensive renovations, or issues affecting habitability are not eligible for escrow holdbacks and require different financing options like the FHA 203(k) Rehabilitation Loan.
The FHA 203(k) loan is designed for substantial renovations that go beyond quick fixes and may involve significant structural work. By contrast, an escrow holdback suits homes that only need minor repairs completed shortly after closing.
Common pitfalls to avoid with an escrow holdback include underestimating repair costs, missing repair deadlines which can endanger loan standing, and neglecting to negotiate who pays for repairs—buyers can request seller credits to cover these expenses at closing.
For more information on FHA loans and renovation options, visit our FHA Loan and 203(k) Streamline Loan pages.
References:
- U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook
- FHA Loan Program – HUD.gov
- NerdWallet, “What Is a Repair Escrow?”
- Forbes Advisor, “Escrow Holdback: What It Is And How It Works”
