This excerpt from a recent comment to an old article of mine, deserves more than “comment back” attention.
“we said we would take $5,000 for…repairs…The addendum was signed by both seller and buyer….Our lender wanted us to take the word repairs out of the contact, but we wouldn’t do it, so our loan fell through…’
Lenders do not want to lend out money for future repairs to a home, nor do they want to finance properties that need repairs. Let’s say a house needs a new roof and the cost of that roof is $7,500. Agents cannot write a contract with an addendum that says “Seller to credit Buyer $7,500 for a new roof” and expect the sale to close. Nor can the lender simply say “remove that addendum”, as if the buyer is supposed to pay the same price without a new roof or the money to buy a new roof.
Clearly this situation has come up several times in my career. Most recently, the roof was OK, but was two layers of composite over a wood shake roof, meaning at time of replacement all three layers would have to come off. Also, since wood shake roofs do not have sheathing, the new roof would have to include all new components and not just new shingles. The owner agreed to “pay” for most of the new roof and the buyer “agreed to pay” for a portion of the new roof. The new roof was installed by the seller prior to closing, and the sale price was increased to include the buyer’s share of the roof cost. Excellent resolution as the lender financed a house with a brand new roof. Everyone is happy.
Another good and often used solution, if the buyer wants to take a credit and pick and install their own roof, is for the buyer to take a credit “toward closing costs”, They simply use the money they were going to use to pay closing costs, to put on a new roof. It’s just a replacement of these monies for those monies. It satisfies the lender, as they will usually allow a credit toward closing costs, but not for repairs. As long as the appraiser doesn’t “call” the roof and require it to be done before closing, the buyer can get the monies this way.
So is Denise “bad” to refuse to take the word “repairs” out of the addendum? Or are the agents (if there were in fact agents involved) “bad” for writing and accepting an addendum in the first place, that they should have known would cause the loan to fail?
It is no surprise to me that a lender would not fund a loan that included a $5,000 credit “for repairs”. It is worth noting here, so that others do not write or accept addendums that offer credits for repairs, that send up red flags to the lender that the house is not in good condition. Perhaps it was a For Sale By Owner that Denise purchased without the assistance of agents. So to For Sale by Owners and private individuals buying from For Sale by Owners. and attorneys who assist in transactions without agent involvement, please note that generally speaking, a lender will not fund a loan with a repair credit, especially if there is little or no downpayment.
I’ve made a rookie mistake in regards to this. In his 35B, my client wanted the seller to get certification that carpenter ants found during an inspection were taken care of.
The day of closing, I find out that the lender was requiring that a pest inspector resolve the problem or declare the property clear of ants.
Boy, I freaked out! However, I did manage to get a pest control company in there and start a treatment, which was enogh for the lender to release the funds.
The lesson I learned is that whatever is negotiated in the buyer’s favor as a result of the inspection, put it in a separate addendum as a generic credit, or reduction in price, and don’t give the 35B to the lender.
Eric! NO. Sheesh. Withholding part of the agreement from the lender is lender fraud. However, I agree that many loan reps do recommend it.
Do you know why the lender has a problem with these things? Because if they have to foreclose they are stuck with the house AND its problems.
Best answer is to get the stuff taken care of before it closes. Sometimes I just pay for it instead of negotiating the commission, or in addition to negotiating the commission, depending on the sale price. Don’t sweep problems, or repair addendums, under the rug. Get the problems resolved, which is best for all concerned, including the lender.
What experiences have you been having in your practice given the new laws requiring the addendum to go to the lender?
Barbara,
As you can see from my response to Eric, I felt the same way as the new law before they passed the new law, so it makes no difference to me. Protecting the lender’s collateral and not committing lender fraud have always been part of how I think about what we do. It really is common sense. Some people just forgot, so they had to make a law 🙂
In my most recent sale where this would have been an issue, the seller did not agree to the repair, so that’s were it ended. The property is still for sale, and I’m pretty sure most any buyer will want the same repair…so maybe we’ll be back in contract one day if it continues to be the best house for my client…maybe not.
Barbara,
Further to mine above, the spirit of the law is very important to me. If the home purchase was $950,000 and the downpayment amount was 50% and the repair was a $15 GFCI…well, I think you get my drift. Technically these things don’t matter…but practically speaking they matter a lot.