How Do FHA Escrow Holdbacks Work?

Phoenix Arizona FHA mortgage escrow Holdback

Home-buyers can use an FHA Escrow Holdback to fund repairs required by an FHA appraiser.  FHA Escrow Holdbacks can save Arizona FHA buyers time, energy and money when compared to an FHA 203k loan.

What is an FHA Escrow Holdback?

An escrow holdback is a process Arizona FHA mortgage lenders use to set money aside for the purpose of completing repairs on a property after the loan funds.  The “Holdback” part refers to the fact that the buyer’s FHA mortgage lender keeps a specific amount of money in their possession post funding that is ear marked for specific repairs.

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In order for an FHA buyer to use  an FHA escrow holdback, the repairs must be required by the FHA appraiser due to the fact that they are violate FHA’s minimum property standards.  An FHA escrow holdback cannot be used for desired, optional or cosmetic repairs.

FHA Escrow Holdbacks – 5 Steps

An Arizona FHA Escrow Holdback is a simple process.  There are 5 main steps:

  1. Appraiser notes repairs to property as required per FHA property standard guidelines on the FHA appraisal report
  2. FHA buyer selects a contractor to bid on required repairs
  3. Contractor submits bids for all of required repairs to the buyer’s FHA lender
  4. Buyer’s FHA lender reviews contractor, work bids and scope of FHA escrow holdback
  5. Upon lender approval – the FHA escrow holdback is set and repairs take place post-closing

How are FHA Escrow Holdback Funds Paid to Contractor?

The benefit of an FHA Escrow Holdback is they enable FHA buyers to finance the cost of repairs rather than paying for them out of their pocket!  Below is an example of a $4,000 repair being put in an FHA escrow holdback on a $200,000 FHA purchase.

$200,000 (purchase price) + $4,000 (total repair cost) = $204,000 (total cost of home to buyer)
$204,000 (total cost)  x 3.5% (FHA minimum down payment) = $7,140 (buyers total down payment)

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By Jeremy House


  1. Dude, are you serious? I can’t EVEN imagine the practical implications of trying to use this strategy with a client, but it would honestly scare the daylights out of me. How do you know for sure that the FHA appraiser will ‘call out’ the particular repairs that the buyer deems important? And what if the buyer counts on it happening, but the FHA appraiser overlooks the repair item(s)? Maybe it’s just my cynical view of the appraisal process these days, so if you can ease my mind or enlighten me further on the practical aspects of escrow hold-backs, I’m all ears!

    • Holdbacks work great when an FHA appraisal comes back with a required repair. For example, lets say your FHA buyer’s appraisal was sent in to me and the appraiser stated that in order to be in compliance with FHA guidelines the air conditoner needed to be replaced. An FHA escrow holdback allows the buyer to finance the cost of the new A/C unit into their loan amount AND it allow for the repairs to be done after closing.

      This is extremely helpful if a seller is not willing to fix the A/C unit. The escrow holdback would allow us to close prior to the A/C unit being fixed. This way the buyer does not have to put their own money at risk prior to closing AND they do NOT have to do an FHA 203k loan (provided the repairs cost less than $5,000).

      Does this help/

  2. how do you overcome FHA’s requirement that only allows an escrow holdback if the repairs cannot be completed before closing, due to inclement weather?


  1. […] latter involves an appraiser noting required repairs on their appraisal report.   For example, FHA rules do not allow for any broken windows. When an FHA appraiser sees a broken window they add a […]

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