Contract Closeup: When the Lender Requires Repairs
Even if the parties are happy with the condition of a property, the lender may want repairs before it commits to a mortgage loan. In that case, Paragraph 7E of the One to Four Family Residential Contract (Resale) (TAR 1601, TREC 20-14) comes into play.
Just because the lender asks for repairs doesn’t mean the repairs will be made. According to Paragraph 7E, absent another written agreement, neither party is obligated to pay for lender-required repairs. Instead, if the parties don’t reach an agreement on the lender-required repairs, the contract will terminate, and the buyer will be refunded his earnest money. Also, if the cost of the lender-required repairs exceeds 5% of the sales price, the buyer can terminate the contract and receive his earnest money back.
Sounds like a possible conflict with the AS-IS provision.
Well yes it is but lenders have significant downside exposure on properties with unlimited repair potential. If the principals figure out after closing they are in over their heads they may decide to let it foreclose.
Not at all. The buyer is purchasing the home with no warranty by the seller as to any particular conditions. Lender required repairs the lender is saying make these repairs or we will not loan yo the money.
Good Information. Keep them coming.
Examples of Lender Required repairs would be helpful. I would assume a roof that fails inspection might be one? What else?
As a lender, I have seen many different items that are required to be repaired in order to be able to meet the investor (Fannie, Freddie, FHA or VA) requirements. Most of the repairs have to do with safety of the buyer and are listed in the appraisal not in the inspection. The most common is the water heater needing to be raised from the floor. Another one common in some areas is the removal of burglar bars if they don’t have safety latches. All the investors have these requirements listed on their websites.
We see rotted wood around the house and WDI issues as lender required repairs a lot
I would differ with Lety. Most of these repairs are noted in the home inspector’s report. The appraiser is not a home inspector as is noted in most of their appraisals. If the water heater is in the garage according to Fannie, Freddie, FHA, or VA, it is ok because it can drain outside. If it is in the house it has to have a pan under it. The home inspector should note the issues of items in the house expecially the safety items. I am concerned that RE agents don’t understand the difference in the appraisal report and the… Read more »
Usually required by FHA or VA loans, the repairs could be anything structural like rotting siding or trim, bare external areas without a protective coat of paint, or safety issues like broken stairs or missing railings, anything not to code that is a safety issue, broken windows, plumbing leaks, etc.
Termites as well as Septic issues are other examples of Lender required “repairs” I have run into in the past. With some good negotiating we are able to make these work and get to closing.
FHA will probably be the biggest source of lender required repairs.
Rotten Wood, Peeling Paint or Exterior Wood Unpainted. Roof and Foundation or usually big dollar but if you get an expert sign off that the roof is good or a structural engineer says foundation is performing, then lender required repairs are manageable. Also I have a Bonded Contractor standing by to make most lender required reports and he will be paid at closing. Not all Contractors can or will do that….This was only a very short list….Good Closing…..and may all be Win-Win
Is the One to Four Residential Contract required to be used by real estate agents, even if one or both of the parties wants to use a different contract?
Is the current 1-4 family contract just a contract for real estate agents, or are there protections built into the contract that help keep agents from getting sued?
A seller can require their own contract be used. Every handle a new home sale?
Please keep comments and/or questions relevant to the subject.
I recently had one that, even though closing costs in lieu of repairs had already been negotiated, the appraiser/lender required a coat of paint on a detached garage due to the potential of lead-based paint (even though the buyers said they were likely to tear down the garage).
What happens when a buyer terminates because of lender require repairs and gives the seller no opportunity to cure? Lender says they are not party to contract and need to disclose the repairs needed. This is often done because buyer wants out to buy another house, and doesn’t want to lose EM.
If lender required repairs, exceed more than 5% of the sales price, can the seller terminate the contract? And return earnest money to buyer?
Had this pass yet if not when will it start .
What if … prospective buyer plans to have house demolished (and not live in it) and build out NEW construction? Why would ANY prospective buyer, in that case, want to sink ANY more money for lender repairs … or any repairs?
In this case my understanding is that the buyer would be purchasing just the lot/land and would be going through a bank with an interim loan. The bank would simply appraise the lot/land and agree to loan $$$ on the property.
Good information.
This is good information,
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Have a client who is seeking a refund of their earnest money due to lender required repairs – in this case, subsequent to the option period they discovered that several areas in the house have asbestos. The cost to remediate the asbestos is well over 5% of the purchase price, but the sellers were willing to make the repairs and remediate the asbestos. The buyers have sold their home and now are put in a position where they need to vacate their home within 2 weeks of close of the sale of their home and the purchase of their new… Read more »