Editor’s note: This is the last in a two-part series. See Part 1.
If your purchase contract contains an inspection contingency and the inspection report comes back with repairs, the lender may require those repairs to be completed before funding the loan. What will you do to cope?
Realtor Mary-Pope Handy described a situation in which her first-time buyers were purchasing a property “as is.” She included the typical home, pest, roof and pool inspections. Because her buyers were obtaining an FHA loan, the lender demanded that the work noted on the inspection reports be completed prior to closing. Otherwise, the lender would not fund the loan. This was extremely stressful and inconvenient for all involved.
This situation raises some very serious “what ifs?”
- Specifically, what happens if the transaction does not close because there is a title problem or a last-minute tax lien posted against the buyers?
- What liability do the buyers have for work being done on a property that they do not own and that the sellers would not have normally done?
- More important, when the work isn’t completed satisfactorily, whose responsibility is it to resolve the problem and to pay for any additional correctional work?
Pope-Handy gets at the heart of this issue when she notes that the difficulty occurs when “the pool or some other element isn’t 100 percent perfect. If the bank sees the inspection reports and disclosures, it will of course show that the 50-year-old house isn’t ‘like new.’ The bank doesn’t like that. In the more than a few cases, lenders essentially don’t permit an as-is sale. In these cases, the banks, credit unions or other lending institutions start rewriting the obligations of the buyers and sellers. Maybe the buyer wants to do the repair differently after close of escrow — perhaps with alternate materials, but now is forced into paying for whatever is fast just so escrow can close.”
When closing costs are really repair credits
Fred Glick, who is a mortgage broker, outlines what often happens in actual practice. If you ask for a repair as a contingency and it appears in the escrow documents, “… the lender will not fund the loan. They are forcing all of us to call it a credit for closing costs when it is for repairs. This is what the agencies have always wanted and will not change. They are telling their investors that the collateral is good. They can’t have repairs to houses.”
Realtor Danielle Sharpe reiterated Glick’s comments: “I do a lot of VA and it’s always required. If a credit is given, it must be in the form of closing costs and not repairs.”
Realtor Judy Moses also observed: “I also don’t like to write in credits for repair. It is a red flag to the lenders. I just ask for a reduction in the sales price. Any credits I use [go] only towards closing costs.”
Final walk-through issues
It’s common for properties to have issues that occur after the property inspections but prior to closing. Sometimes the problems are not visible until the final walk-through. Realtor Leslie Ebersole observed: “Lenders are refusing repair credits at closing. An issue when something is found at the walk-through we used to say, ‘We’ll work out a credit at the (closing) table,’ but no more.”
Just leave it out
In Pope-Handy’s blog post, she notes a disturbing trend in how agents and mortgage brokers are coping with this situation: “So what is becoming common practice ‘in the field’ is to simply not mention these disclosures or inspections in the offer.”
Pope-Handy also notes that many of the mortgage people now are suggesting that the agents “simply leave things out to keep the situation uncomplicated.” She rightly notes this could be considered lender fraud.
Insurance companies get in the game
Realtor Kate Schumacher bumped into something even more surprising: “I just had a buyer say her insurance agent wanted a copy of the home inspection before quoting a rate for the homeowners insurance.”
Buyers who don’t know any better may very well supply the inspection report. If the insurance company wants to know the condition of the property, it needs to rely on its own inspection.
A secondary issue here is for the home inspector. Suppose the inspector missed an electrical issue that causes the house to burn to the ground immediately following the closing. Could the home inspector now be on the hook with the insurance company?
The future of inspections and repairs?
Glick, the mortgage broker, made the following speculation about what could happen regarding these issues. Although it is speculation, he said that he had spoken with several lenders who were considering it.
“The future is that the computer will do the appraisal and the lender will order home inspections instead of appraisals. This way, they will know everything about their collateral and completely change what you’ve negotiated.”
This is a highly complex issue. If the lender makes demands about the inspection reports or repairs, you may want to shop for another lender. If the buyer wants a credit for a repair, it will probably be acceptable to reduce the price or the closing costs.
What you would be smart to avoid is omitting inspections or written commitments about how these issues will be handled. Moreover, because of the liability issues, do you really want a contractor or someone else making repairs to a house when it doesn’t belong to your buyer? Tread carefully.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Discover why leading Realtor associations and companies have chosen Bernice’s new and experienced real estate sales training for their agents at www.RealEstateCoach.com/AgentTraining and www.RealEstateCoach.com/newagent.