You probably spent months hunting for the perfect house. You submitted the offer, signed the paperwork and handed over the good faith deposit. Though escrow is an indication the transaction is nearing an end, it is still possible for damage to occur. When a home is “in escrow,” it means that the house is under contract to be sold but is in a sort of an in-between stage since it has not yet gone to closing. Anything that happens during this time could still potentially affect the outcome of the sale.
So what happens if a home is damaged during escrow?
While it is relatively rare, homes can be damaged by fire, natural disaster, vandalism or some other issue during escrow. If your home is in escrow, significant damage to its exterior, interior or structure is just about the worst case scenario.
What Happens During Escrow?
First of all, we should discuss what actually happens while a house is in escrow. Numerous things need to be reviewed and a number of inspections need to be done as the process moves forward. Real estate purchases that are still under contract typically need to a home inspection to ensure that there are no underlying problems that were not obvious before the offer was put in.
If an inspection is required for financing or other reasons, it is extremely important to make sure that it takes place before closing. Without a home inspection, the buyer takes on the responsibility of fixing any issues that come up later down the line. Some of these issues may be unknown to the seller, but some may have been intentionally hidden.
Getting mortgage financing approval is also a typical process that takes place during escrow. Even if you have been pre-approved for a mortgage before you started searching for your new house, the real mortgage process really ramps up after a contract is tentatively signed. Having a financing clause in the contract gives the buyer a legal way out of the deal should they find that they cannot get approved for a mortgage or if the house does not pass inspection.
While home inspections and mortgage financing tend to be the most common conditions that are included in purchase agreements, other issues are also dealt with and reviewed during escrow, including the following:
- Title insurance
- Schedule of exclusions
- HOA documents
- Property and liability insurance
- Good faith estimate
All these aspects take time to go through and review before the closing date approaches.
Significant Damage to a House Under Escrow is a Problem
Most homebuyers consider significant damage to the house in escrow to be a deal-breaker. If the damage to the house waiting in escrow is more than 5% of the total contract value, the buyer will likely be provided with the opportunity to exit the deal. However, there might be some negotiating room with the seller considering the newfound damage.
The first thing to do after learning about your home’s damage is to analyze the contract. Most purchase agreements contain detailed information about how such a scenario is handled. In general, if the cumulative damage adds up to about 5% or less of the aggregate contract value, the buyer and seller typically agree to keep the deal alive. However, the deal continues to move along only if the seller is willing to repair the damage prior to the closing date. This is a sensible solution as the buyer originally bid on a home without the damage in question so he or she should not be on the hook for the repair costs.
The Timing of the Damage
Many situations in real estate deals will depend on when the damage occurs. If the property faces serious destruction before the paperwork is available, the buyer may back out of the deal. However, if he or she already signed the last closing documents, the damage may not prevent the sale. The buyer and seller usually agree on what terms to end the deal. If the property suffers a fire, the buyer may contact the seller about the issue that was outside the control of either party. In these situations, it is possible that insurance will cover the costs and the sale progresses until the buyer is the new owner.
The Extent of the Damage
Some deals do not close if the property suffers extensive damage to the point that the house is no longer livable. However, the sale may still progress if the seller or an insurance company covers the costs of the damage. This may depend on coverage and how long it takes to restore the home to the previous condition. Some buyers are willing to add some costs to the closing deal if it improves the property to a state better than it was previously. Insurance and other involvement in the reparations may prevent the sale from falling through. However, the buyer is generally not responsible for the repairs unless he or she is the official owner.
How to Proceed After Discovering the Damage
- Check the Contract
The majority of purchase agreements drafted up will include information about how these situations should be handled. So the first thing you should do if your home is damaged during escrow is check the contract.
Typically if there is damage, and it is less than 5% of the total value of the home, both parties agree to move forward with the transaction. But the seller will need to fix the damage prior to closing. Any damage worth more than 5% of the home purchase value will give the buyers an opportunity to cancel the agreement and get their deposit money back.
If your contract does not include a provision that covers this, you need to consider having one added before you sign. Such a clause typically provides coverage for things like appliances, boilers or central air conditioning systems that might break.
- Get the Bank Involved
If the buyer has arranged to take out a mortgage, most lenders will approve a credit up to three percent without incident. Anything more than that and the bank will want to know about the damage, have a new appraisal, and may even cancel the loan.
More commonly the lender is to want to redo the loan, adjust the purchase price, and put it back through underwriting. You’re basically starting back at square one, so be prepared to extend the contract’s time frame since the bank may require another appraisal. Both parties will have to extend the contract’s time frames.
- Get the Property Inspected
It is so in the buyer’s best interest to have a property inspected before closing. This prevents the seller from claiming that the damage is new, and if the buyer did not inspect, there is no way of proving otherwise.
Any problems that are found during the inspection can be negotiated with a credit or require that the seller repair prior to closing. No matter how much pressure you feel or how long you have been in the market, waiving a property inspection to be competitive can get you into deep trouble.
- Do a Walk-Through Before Closing
Make sure you do a walk-through the day before or the day of closing. Walk-throughs can prove invaluable when it comes to determining any pre-existing damage or serious problems with the home’s structure/systems. If you notice something wrong during this walk-through, stop the closing until the issue has been resolved by the seller.
Most real estate transactions go smoothly. Buyers and sellers make a deal, sign a contract, inspect, get a loan and close. While every purchase or sale can cause stress and anxiety, encountering damage during escrow will really up the ante.
What is the Lender’s Role After Damage is Discovered?
If your home in escrow is damaged and you took out a loan to acquire the property, the situation is a bit different as there is a mortgage company in the mix. As previously mentioned, there are plenty of lenders who are willing to approve a credit upwards of 3% of the contract value. If costs extend beyond this level, the home loan lender will almost certainly want to know what, exactly, is going on.
It is also possible the lender will simply decide to cancel the loan, leaving the buyer without the financing needed to complete the purchase. It is against the law and your contract to keep information of damage from the mortgage lender by lying about the home’s condition just to keep the loan alive. When in doubt, tell the truth about your home to your lender. Be patient and there is a good chance you will find a solution that proves mutually beneficial to you, the home seller and the home loan lender.
Proceeding in Light of Property Damage
There are rare situations where the property sustains damage and both buyer and seller will still proceed with the sale. These events generally occur through a natural phenomenon or when there are other defects that could harm the house such as a fire, weather or storms and earthquakes. If the property suffers so much damage that is it not salvageable, the buyer will have the opportunity to back out. However, if repairs may fix the situation, the buyer and seller may work out how to proceed and ensure that the deal closes between them. It is often important to have a real estate lawyer handy when these circumstances arise.
What Happens at Citrus Heritage Escrow?
Buying a home should be an exciting time in your life. While it is easy to get overwhelmed by all the line items on your loan, a qualified home lender will be there to guide you through every step of the process.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200