It never fails. After a potential buyer’s home inspection of what is otherwise the perfect property, there are issues that require the seller’s attention. Whether it is a faulty furnace, double tapped electric circuit breaker, rotten steps or mold, inspection defects like these can bring a screeching halt to the simplest of transactions.
A home buyer has the right to expect certain defects to be addressed by a seller, and often a seller will give a concession by reducing the sale price or providing a closing cost credit. But when a concession is not an option, a seller can always agree to repair or correct the defects at the seller’s expense prior to closing.
But including the seller’s agreement or obligation to correct defects in a purchase and sale contract can raise the concerns of a wary lender or underwriter. Including details of property defects, however minor, may cause a bigger problem than the defects alone. Seeing that the property is in need of repair may change the lender’s valuation of the property or possibly its commitment to lend and/or add conditions to the loan approval process.
One commonly practiced remedy to this issue is to have the buyer and seller enter into a separate contract for the repair or correction of defects by the seller prior to closing. This contract is not made part of the purchase and sale agreement, and is often not presented to the lender. Although this would seem to solve the problem, keeping material facts from a mortgage lender is not the best practice and may have ramifications far beyond the transaction at hand.
When considering the use of a repair agreement, prudence is advised. Agreements like this are best made as an addendum to the purchase and sale contract and disclosed to the lender. The disclosure allows the lender to decide if the defects are material or not. Like anytime there is a question of material fact, disclosure is the best policy.