What Happens if Your Soon-to-be Home is Damaged During Escrow?

After months of house hunting, you finally found the perfect house. You’ve put in an offer which was accepted, signed on the dotted line, and handed in your deposit.

But now you’ve entered a period known as ‘escrow,’ which means the end of the road still hasn’t been reached. During this time period, anything can happen.

On occasion, a home that’s still under contract can be damaged by natural disasters, fires, vandalism, theft, or other issues.

Major damage to a home under escrow can throw a wrench into a real estate purchase and pile on the stress and headaches – both for the buyer and the seller. If this unfortunate scenario occurs, it’s important for you to take immediate steps to rectify the situation and save the deal.

What Exactly Happens During Escrow?

First of all, let’s discuss what actually happens while a house is in escrow. A bunch of things will still need to be reviewed and inspected as the process moves forward. Typically, real estate purchases that are still under contract need to undergo home inspections to make sure there are no underlying problems that you didn’t notice before you put in an offer.

It’s extremely important to make sure an inspection takes place before closing. Any seller can easily scam a buyer by falsely claiming that a certain issue was pre-existing, and didn’t occur during escrow. Without a home inspection, you have no way of proving your case.

Getting mortgage financing approval is also a typical process that takes place during escrow. Even if you’ve been pre-approved for a mortgage before you started house hunting, the real mortgage process takes full speed after a contract is tentatively signed. Having a financing clause in the contract gives you a legal out of the deal should you find that you can’t get approved for a mortgage for whatever reason.

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.

Property Damaged During Escrow? Check the Contract First

If the property you purchased becomes damaged during escrow for whatever reason, the first thing you should do is check the contract. The majority of purchase agreements that are drafted up will include information about how these situations should be dealt with.

If the damage is less than 5 percent of the total contract value, usually the buyer and seller still mutually agree to keep the contract process moving, as long as the seller agrees to fix – and pay for – the damage before the closing date arrives.

Any damage worth more than 5 percent of the home purchase value will typically involve the buyer backing out of the deal and getting their deposit money back.

Before you sign any purchase contract, make sure this provision is included first. This type of clause will usually cover things like appliances, HVAC systems, and anything else that could break down. Without such a provision, you could be stuck with the house – and the expense and responsibility of fixing whatever’s been damaged.

Call Your Lender

Most lenders will typically approve a credit of up to 3 percent, but any more than that and the bank will need to be notified of the damage. A new appraisal will need to take place as well. Worst case scenario: the loan will be canceled.

Typically what happens is the lender will revamp the loan, modify the purchase price, then send it back to the underwriter. Since this is a time-consuming process, the time frames within the contract will most likely need to be adjusted.

Don’t hide things from your lender – any significant damage that’s not communicated is considered deceitful.

Do a Walk-Through Before Closing

Make sure your contract includes a clause that allows you to walk through the home at least once or twice before closing. This will give you the opportunity to identify if something’s damaged or not functioning the way it should.

If you notice something wrong during this walk-through, put a halt on the closing until the issue has been dealt with by the seller. You are essentially in the driver’s seat here because the seller wants to close and get their cash. It’s in the seller’s best interests to comply and do what it takes to fix any problems.

Ideally, this walk through should take place the day of closing, or even the day before. Anything can happen in the matter of a few short hours.

It can’t be stressed enough: all purchase agreements should be drafted by competent, knowledgeable real estate agents who know precisely which provisions should be included to protect all parties involved, including you. Without these clauses, you could be left responsible for issues that were no fault of your own.

Do yourself a favor and make sure to team up with an experienced real estate agent who will create a solid contract with no loopholes for the seller to be able to crawl through.