Realty Times - Can You Get A Loan Without A Termite Inspection?

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Can You Get A Loan Without A Termite Inspection?

by Peter G. Miller

It was a simple question -- at least so it seemed -- that a reader raised with Ask Realty Times. The correspondent wanted to know if a seller must give a copy of the termite inspection to the buyer.

My response was yes because the report is a material piece of information. I also said "in a typical real estate transaction there is a mortgage. As a condition of obtaining a loan, the lender will require evidence that the property is free and clear of wood-boring insects and thus require an inspection by a qualified pest controller."

It's the second comment that raised an interesting response.

Rick VanDermyden with the Sacramento firm of Pacific Coast Realty said not so fast: Conventional lenders do not universally require termite inspections.

"The point that I felt should be made clear for consumers is the inspection and repairs are both negotiable items and their agent should be advising them on this issue. The lender is not the stop gap to insure they buy a home that is inspected and has been cleared."

A conventional lender, says Rick "does not typically 'require evidence that the home is free and clear of wood-boring insects and thus require an inspection by a qualified pest controller.' In addition, if there is a problem the lender will not necessarily stop the loan from going through 'without appropriate treatment and/or repairs.'"

Could Rick be right?

Termites can be a problem -- no one doubts that. According to the National Park Service the little scamps produce damage worth $1.5 billion annually.

As it happens, I live in one of those areas where termite inspections are the norm -- the only questions are when the inspection takes place and who pays.

However, it turns out that the inspection norm in my community is not the norm nationwide, so Rick is right: Lenders do not always require a termite inspection or repairs.

"Freddie Mac," says spokesperson Eileen Fitzpatrick, "only buys the loan from lenders and I think most lenders require a termite inspection."

Sandra Cutts at Fannie Mae explains that her organization does not require a termite inspection. "However, we expect a lender to obtain an inspection if the appraisal indicates evidence of infestation (to show that the condition doesn't pose a threat of structural damage) and/or when it is common and customary in the area to obtain one."

I asked brokers and salespeople if termite inspections were required around the country and received several interesting answers from the Real Talk listserve operated by the Internet Crusade.

Al Napier, a broker in Newington, CT with the Napier Group, says the local form agreement in his area provides for a termite inspection but does not require one.

Thomas Early with the The Buyer's Real Estate Brokerage, an exclusive buyer broker in Columbus, OH says that, "While it would be nice to have a doc without the standardized language for termites, it's really not up to us in our market. Lenders require termite inspections for all loans so it is just a matter of who pays for it. Of course we always get the seller to pay."

"In our purchase contract it's an option," says Ira Serkes, the co-author of How To Buy A House In California (Nolo Press) and a broker with BerkeleyHomes.com

"The St. Louis board mentions termite (a.k.a. wood-destroying insects) in 2 places," says Steven Rosenfeld, a broker with Consolidated Real Estate in St. Louis. "Paragraph 9 (Adjustments & Closing Costs) indicates that it is customary in our market for the buyer to pay for this inspection. Paragraph 10 (Inspections, Disclaimers and Warranties) offers the buyer a (default to) 10-day window to have the inspection performed. Should there be a termite situation, presuming the seller had not disclosed it prior to the sales contract, it is expected that the seller will both eliminate the termites and repair any damage that they have visited upon the property. If the seller does not do this, then the seller's disclosure must be revised."

"Truth be known, here in St. Louis, lenders will not fund any frame structure without termite inspection or maintenance agreements -- and the overwhelming majority of our housing is stick- built. It is possible for a cash buyer to waive their (termite) inspection rights, however, the buyer's broker would be at high risk for the transaction. If I were brokering such a transaction as a buyer's representative, I would volunteer to pay for the inspection myself, if the buyer didn't want to."

It's apparent that some portion of all homes are sold without termite inspections. It may be that termites and other wood-boring insects are just not that much of a hazard -- or a hazard at all -- in certain geographic areas or with specific forms of construction. That would explain the different inspection traditions and customs seen around the country. Also, in a hot market where non-contingent offers can be a real-world necessity, a purchase offer without a termite inspection requirement could have one less barrier in the chase for a successful offer.

From my perspective, I think many buyers, sellers and lenders are well-served by termite checks. Here's why:

First, according to the 2003 Profile of Home Buyers and Sellers published by the National Association of Realtors, 63 percent of all purchasers had buyer representation. Given the obligation of buyer brokers to protect purchaser interests, why would an offer not contain a termite inspection clause? There could be reasons -- but such reasons should be explained and reviewed with buyer clients.

Second, what if a seller is sued after the transaction by a purchaser who claims termite damage was not disclosed? If such a situation were to arise, would not an independent termite inspection delivered prior to closing be an overwhelming defense for owners? For this reason, does it not make sense for sellers to want a termite inspection with properties that are subject to such damage?

Third, if you're a lender the property is your security in the event the borrower fails to make repayment. To rely on appraisers seems unwise because appraisers are not qualified or licensed to act as pest controllers. A drive-by or automated appraisal is surely not a substitute for an actual termite inspection.

To Rick and all who wrote, a hearty "thank you" for your views, ideas and experiences.

For more articles by Peter G. Miller, please press here.

Published: August 12, 2003

Use of this article without permission is a violation of federal copyright laws.

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center.

Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions.

Peter welcomes your questions, comments, and news releases via e-mail at .

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