If you’re considering buying or selling a home, you already know that no property is perfect. Some could use an updated kitchen or bathroom, and others need a new roof or foundation. A handy home buyer may be willing to accept some of these issues and perform repairs themselves to save a buck or two. Unfortunately, some property problems can cause home loans to fall through and will need to be addressed before your transaction is completed.
Lender required repairs can make or break a home sale, and knowing what they are and how to handle them could make the difference between a smooth sales process and a complicated one. Let’s take a look at what lender required repairs are, as well as some of the implications they have on home sales.
What are Lender Required Repairs?
While some defects in a home are minor and can be overlooked by the buyer, others may pose a safety risk, affect proper functionality of the home, or involve zoning or code violations. Any of those defects could affect the buyer’s chances of securing a loan to purchase the property.
Lender required repairs, sometimes called property condition requirements, are those repairs that are required by the lender in order to secure home financing. They typically involve fixing the more serious issues found on the property. Lender required repairs help ensure the buyer doesn’t purchase a home that needs immediate repairs, but they are really there to protect the lender’s investment by ensuring the property can be resold without taking a loss in the case of a default.
How do Lenders Assess Your Property?
There are two main types of assessments that lenders use to determine the value of the home and whether or not repairs are necessary to approve the loan. They are home inspections and appraisals.
A home inspection is exactly what it sounds like. A qualified home inspector looks over the home to identify any major structural problems or safety issues. These may include issues with things like plumbing, electrical, HVAC systems, sewage, faulty or missing fire, and carbon monoxide detectors, as well as anything else that would affect the safety or livability of the home. They also look for evidence of damage to the property caused by fire, water, or insects.
A conventional loan appraisal is separate from a home inspection and assigns a value to the home based on its location, condition, and unique features. The location is obviously set in stone, but a home’s condition will certainly affect its value. It’s important to get a home inspection early, so you can tackle any appraisal required repairs before they become an issue.
Examples of Lender Required Repairs
As you may have gathered, the types of repairs that can affect whether a sale goes through or not are generally structural in nature. Cosmetic repairs like addressing a tear in the wallpaper or replacing cigarette-burned carpet may be high on the to-do list of prospective buyers, but they won’t affect the sale from the lender’s point of view.
Lenders are looking for major structural problems and issues that pose safety risks. Some examples of lender required repairs include:
- Structural Repairs - If the foundation, framing, or roof are found to be unsafe, they’ll likely have to be repaired prior to securing the loan.
- Plumbing - Leaks in the plumbing will eventually lead to water damage, so if there are any problems identified in the plumbing, they will need to be addressed.
- Electrical - Problems with the electrical systems are also an area where significant property damage can occur if not addressed. They can cause major issues in securing a loan.
- HVAC Systems - Air conditioners and furnaces are essential parts of keeping a home habitable and need to be in good working order. They are also expensive to repair and replace, so some lenders require the seller to address these lender required repairs before closing.
- Safety-related Issues - Keeping the home safe is a top priority, so if the inspection reveals anything from missing or broken fire and carbon monoxide detectors to unsafe materials used in the home’s construction, the seller or buyer will likely need to take care of them.
If the buyer is applying for an FHA(Federal Housing Administration) or VA(Veterans Administration) loan, there are a number of additional issues that may require resolution prior to closing. These may include things like:
- Repairing all leaks
- Repairing faulty gutters and downspouts
- Replacing all doors and windows that are not weather tight
- Ensuring screens are on certain windows
- Remediating standing water issues near the foundation
- Protecting wood homes from termites
- Ensuring access to a sufficient supply of safe water
These lists don't encompass all issues that may trigger lender required repairs, but they will give you a good idea about what kind of issues lenders are looking for.
When it comes to a conventional loan, home condition requirements are less stringent. In many cases, they won’t even require a home inspection for approval. That doesn’t mean you shouldn’t get one, however. Having your potential new property inspected prior to purchase means you won’t get caught off guard with any major repairs while you’re still in the honeymoon phase with your new home.
Are Lender Required Repairs Mandatory?
While most lender required repairs aren’t mandated by law, they may be required to sell the home in a timely manner. Unless the buyer is paying cash, there’s a good chance their lender will require the repairs be done prior to closing. If this is the case, you won't be able to close the sale with your potential buyer without making the repairs, effectively mandating them.
If the issues are serious enough, the building could be deemed unsafe and condemned. That would most often make repairing the issues mandatory prior to making a sale to a buyer who needs financing to make the purchase. Many states don’t even allow the sale of condemned properties, but if your state allows them, you’ve got a couple of options.
First, the property owner can complete all repairs before selling the house. That mitigates the safety issues and will allow for buyers to secure loans to purchase the property.
Another option, if the seller doesn’t want to make the repairs, is to find a cash buyer. There are lots of investors out there who specialize in razing or repairing dilapidated homes, and they could be the perfect option for a motivated seller of a condemned home.
Who Pays For Lender Required Repairs?
With any large expense, most people want to know who has to pay for them. In some instances, a buyer will offer to pay for repairs. In a buyer’s market, this isn’t the norm, as they are already taking on a large amount of debt and are often reluctant to take on more than expected. If the offer comes with a substantial discount, however, buyers can be persuaded to tackle the lender required repairs themselves.
Another option is for the seller and buyer to split the cost of repairs. Maybe the seller will repair the roof, and the buyer will repair the floor. Maybe the seller will complete some of the repairs, but it’s up to the buyer to purchase and install appliances. If the buyer and seller can come to a satisfactory agreement, this can be a great way to go.
In many cases, the seller wants to sell the property as painlessly as possible. They are on the hook for lender required repairs to make that happen. Most sellers will make the repairs in order to close the sale, but others will opt not to. If they don’t want to make the repairs, they’ll likely have to sell the home as-is or find a cash buyer who isn’t afraid to make some repairs for a reduced purchase price.
If the seller and buyer can’t come to an agreement on who will pay for repairs, the contract will usually be terminated, and the buyer will be refunded their earnest money payment. At the end of the day, the party responsible for repairs is negotiable, and it really depends upon the agreement between the buyer and seller.
How to Avoid Lender Required Repairs
The best way to handle lender required repairs is to resolve them long before buying or selling a home. If you’re a seller, that means making sure the home is in suitable shape prior to putting it on the market.
If you’re a buyer, that means hiring a home inspector to do a thorough examination prior to buying the home. This information will give you some negotiating power with the seller and can help you avoid the delays that can come with lender required repairs.
The Bottom Line
When it comes to lender required repairs, conventional loans will have fewer requirements and could open you up to more options in your local market. If you’re handy and aren’t afraid to get your hands dirty, this could add up to significant savings on your new home.
If you’re applying for an FHA or VA loan or prefer a home that’s move-in ready, making sure the seller takes care of lender required repairs prior to purchasing the home will ensure your dream home sale closes on time and doesn’t turn into a money pit.
Contact us today and set up a loan custom tailored to your situation!