You’ve applied for a home loan, and suddenly, half-way through the process the lender gives you a list of repairs they want made before they fund the deal. Sometimes these repairs are trivial, even silly. But sometimes they will cost thousands. What just happened?
An appraisal is how the lender gets a second opinion of fair market value and how they determine whether a property meets minimum requirements set by the underwriter. Lenders not only measure your credit risk, but the risk of the property under contract. If the lender finds that a house doesn’t meet minimum property requirements, they’re going to demand it get fixed as a condition for loan approval.
The most commonly requested repairs for homes in and around Seattle are to install carbon monoxide detectors and earthquake straps on water heaters. The good news: these are trivial fixes, and most sellers are willing to take care of it for you. The bad news: if the appraiser made a note of these deficiencies in his report, the lender may schedule the appraiser for a second trip to verify all conditions have been met. This slows down the closing process and the buyer gets to pay for that second trip. The best course of action is to watch for CO detectors and earthquake straps (or the lack thereof) during your inspection of the house. Get these installed before the appraiser arrives.
If the repairs are more difficult, there’s a chance the seller can’t afford the repairs. You, as the buyer, have two options: pay for the repair and get it done right now (risky), or use a repair escrow (not always possible).
I advise anyone who plans on making repairs to the seller’s property before closing to get in touch with a lawyer to protect you from liability if something were to go wrong with the repair. A lawyer can also help protect you from loss if the deal were to fall apart after spending thousands to fix somebody else’s property. A co-worker buying a home near Greenwood had to repair the side sewer before closing the deal. The lender somehow found out about the problem and demanded it be repaired. My co-worker had to pay out of pocket to excavate, replace, and backfill the side sewer all while meeting the closing deadline. Fortunately for him, everything went ok, but it was an extremely stressful experience.
Sometimes the bank’s demands are downright silly. A recent deal of mine was a HUD foreclosure. The only repair the lender wanted was to have the plumbing under the kitchen sink tightened. It would have been ridiculously easy to do, but we were prohibited from making any changes to the property.
In this case we were able to negotiate a repair escrow with the lender to get out of the catch-22. A repair escrow is simply money set aside in escrow to pay for the repair. This reduces risk to the lender while allowing you to close on the deal and perform the repair later. The downsides of a repair escrow: they are not always available, there’s additional bureaucracy involved with submitting written estimates from contractors, and there’s a limit to the size of the repair.
One of my lender contacts sent me a checklist that’s used for FHA appraisals based on HUD Handbook section 4150.2. Flip through if you’re curious about what an appraiser cares about. There’s about 86 items in the checklist.FHA-Inspection-List.pdf (136 downloads)