What Happens If a Home is Damaged During Escrow?

Occasionally, a home that’s under contract will be damaged by fire, natural disaster, or some other issue. Significant damage can derail a real estate purchase and add a remarkable amount of stress for both buyer and seller. Though it happens rarely, all parties need to react quickly and understand how to move forward.

Check the contract

Most contracts provide a process to deal with damage when and if it happens. Typically if there is damage, and it is less than five percent of the total value of the contract, both parties agree to move forward with the transaction. But the seller will need to remedy the damage prior to closing.

If your contract doesn’t 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.

For damage over five percent, most buyers will have the opportunity to cancel the agreement and move on, without losing any of their deposit money.

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.

What’s most common is for the lender to want to re-do the loan, adjust the purchase price and put it back through underwriting. Going back to the beginning takes time and may require another appraisal. Both parties will have to extend the contract’s time frames.

It’s smart practice to keep your lender in the loop — and remember, it’s fraudulent to hide credits or serious damage. Read more