If your home is in escrow, significant damage to its exterior, interior or structure is just about the worst case scenario. You probably spent months hunting for the perfect house. You submitted the offer, signed the paperwork and forked over the deposit. Though escrow is an indication the transaction is nearing an end, it is still possible for damage to occur as a result of a natural disaster, theft, vandalism, fire or something else. Here’s exactly what will happen after you discover the damage.
Significant Damage to a House Under Escrow is a Problem
Most of those who have a house waiting in escrow consider significant damage to the house a deal-breaker. After all, why should a home-seeker pay full price for a home damaged after he or she committed to the deal? However, it might be possible to take some quick steps to remedy the situation and keep the deal afloat, especially if the damage is not extensive.
How to Proceed After Discovering the Damage
The first thing to do after learning of 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.
What About Significant Home Damage?
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. If an agreement on a new price cannot be reached and the damage is beyond 5% of the total contract value, you can leave with your earnest deposit money in-hand. Unfortunately, there are some contracts that do not include such a provision to protect home buyers. If you are house hunting, make sure this provision is added to your contract before signing on the dotted line. The clause should be applicable to home damage as well as damage to the home’s appliances and even the systems such as heating and cooling equipment.
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 in play. Plenty of lenders 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. A second appraisal might be necessary at this point. In most situations, the lender revises the home loan, modifies the property’s purchase price and sends it right on back to an underwriter. This process is quite arduous so it might might be necessary to modify the time frames detailed in the contract.
It is also possible the lender will simply decide to cancel the loan, leaving you without the financing you need to move into your new digs. Though this is a nightmare scenario, it is better than defrauding 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.