You may have heard me comment here that mortgage underwriting guidelines aren’t really tighter now – they are the same as they always were, they’re just being used now.
But over the last few months one thing has gotten a lot tougher – how to handle repairs.
It’s fairly standard that after the home inspection, the buyers will make repair-requests of the sellers. Because sellers typically cut corners or do shoddy work, we’ll ask for a money credit, rather than have them complete the actual repairs.
The lenders insist on the repair monies going towards the buyers’ closing costs, which is fine – unless we negotiate a credit that’s larger (closing costs for most buyers are around 1%).
When that happens, we’d have our contractors submit their invoices to escrow, and be paid out of the sellers’ proceeds at close to ensure that we use the entire credit.
But now the lenders are insisting on them approving the sellers’ estimated closing statement prior to close – and they’re looking for repair bills. In cases where we have had some repair costs being included on the sellers’ side, the underwriter has requested a copy of the physical inspection report too – and have been critical of what they have found.
It is prudent for lenders to have a full grasp of the property being secured, no question.
The fear is that their additional scrutiny will cause them to deny loans for some properties, even if we have adequate repairs lined up to get them in shape. They haven’t killed a sale for us yet, but it’s coming. It’ll make the fixers harder to sell, driving down their prices further to compensate – and causing more competition for the cream puffs.
Hopefully the 203k and other home-improvement mortgages will gain favor with those who don’t mind buying a project!
It will push down the price of fixers and provide more profit to flippers with cash…
Check out this fixer. From $610,000 to $1.55m in 1 year.
http://www.redfin.com/CA/Encinitas/678-Arden-Dr-92024/home/4115114
Just went for a 203K, pretty much a waste of time.
Why should the lenders care if repairs are less than 1%? I can understand why they’d want to investigate if repairs were substantial, to rule out fraud and price inflation.
Mozart, why was the 203K a waste of time? did it not go through?
Cash buyers can get big discounts on fixers with minor problems that prevent lenders from loaning on them (no stove, no flooring, no kitchen cabinets, broken windows, that sort of thing), fixing them up, selling them at a much higher price to somebody with a loan, and pocketing the difference between the cost of the remodel and the sales price. That is, since people with loans can’t easily buy fixers, demand for fixers is lower than it should be, allowing for a perfect chance for arbitrage and easy profits.
Geotpf,
“Easy Profits”. Ha! Good one. If there is one rule about renovating, it is always assume the worst, and it will be worse than that.
I thought I was pretty savvy, and let me tell you that I underestimated the extent of work in a fixer. Those guys mentioned in W.C. Varones probably deserve every penny of that mil.
Chuck