Lily Tomlin  “The road to success is always under construction.”

Are you preparing to get a mortgage on a home you are about to buy or refinance?  If the mortgage company requires an appraisal on the house, it is good to investigate, inspect, and innovate if needed before spending your money on the appraisal. For example, what needed repairs can you see with the home?  Will the seller agree to pay for getting all the repairs completed?  How much will you need to pay for the repairs? 

Investigate

The home condition can create obstacles to getting the value needed or getting approval from the mortgage company’s underwriting department. For example, appraisers notate repairs that affect the structure, security, and sanitation of the home. Mortgage companies require these types of repairs to be completed before closing.

Inspect

Repairs that affect the structure include rotted wood; foundation problems; roof leaks or missing shingles; peeling paint (especially if the home was built prior to 1978); broken siding; electrical, plumbing, or heating problems; or issues with the air and duct systems.  

Repairs affecting the security of the home include doors that do not operate correctly, broken locks, or open access to the house from outside. 

Repairs pertaining to the home's sanitation include drainage problems, faulty water supply, septic issues; mold; and more.

Most underwriters want the trouble areas corrected before closing, but there are some workarounds when items can be fixed after closing, too.

Innovate

When the repairs must be fixed before closing, the buyer and seller negotiate who will pay for which repairs. If the buyer pays, the mortgage company will have to verify in the borrower’s asset accounts that they have the funds to cover closing and repair costs. If the seller pays, then he or she cannot pay the buyer with a “repair allowance.” Most traditional mortgage programs no longer allow repair allowances or “carpet and paint allowances.” 

In cases like this, the seller could put the money in escrow to be paid to the repair vendor after closing. Some loan programs require the seller to pay one-and-a-half times the amount of the contractor’s bid into the repair escrow account. The extra fifty percent is simply a cushion to make sure, if the repair bill ended up higher than estimated, the seller would have the money to complete repairs. If unused, the extra fifty percent can be paid back to the seller when all the work is complete.

Should weather prevent the job’s completion before closing, the mortgage underwriting guidelines permit certain repair items to be completed after closing. These include landscaping and outdoor painting. In addition, in some locations, the mortgage company can allow the heating and air conditioning to be installed after closing to prevent them from being stolen before the new homeowners move into the property. 

Martin and Maria Miller

Call on resources to repair and get the second home they need

Martin and Maria moved more than a thousand miles from the place where they had lived and built a life with their children. After the kids were older, the couple had an opportunity to take over a business on the other side of the country, and they took it. Later, their children got jobs in different areas of the country. The Martins yearned to have a central rallying place where their family could get together for the holidays and gatherings.

A close family friend from their hometown knew of their desire for a second home in the old neighborhood. This close friend set them up with a realtor who found them a house close to where they once lived. It was beaten up and needed a good cleaning, some carpentry, and a bit of new sheetrock.

Halfway through the loan process, the appraisal came in with a mile-long list of items that could affect the structure, safety, and sanitation on the house. Due to the types of repairs needed, the lender required these repairs to be completed BEFORE closing. 

The Millers realized with a sinking feeling that they had just spent hundreds of dollars on an appraisal and now seemed to be in a catch-22. They could not close on the home until repairs were done, but the seller did not have the money for repairs until after the closing. In so many cases, this is where the bargain deal dies. 

Nevertheless, good friends can be valuable, especially when their trade is fixing and building houses. Their hometown friend got the list of needed repairs and whistled up his construction buddies. Everyone agreed to work for just about free just to help the Millers.  

They put together an itemized agreement to start work when the loan was approved for all but the repairs. The seller signed the agreement that he would pay the hometown friend and his pals on closing day when he got the funds. Once the loan was preapproved by the lender’s underwriter, hometown friend and his pals went to work. The appraiser went back to the house to verify the completed repairs so the Millers could quickly close on their home, where they and the rest of their family could gather together in their former hometown … all thanks to their good-hearted hometown friend … whom they now looked forward to having over for their celebratory dinner!

You always must pay attention when the FED speaks, yesterday the FED spoke and shook the markets. While the move was quick and sharp, the bond market was able to recover the steep loss by the end of the session. The reaction just proves why you must listen to the FED when they speak, and sometimes when they shake up the market the market recovers quickly, other times it starts a trend. Given the news and the thoughts they shared, it won’t be long before the next trend will begin, and it won’t be your friend.

Looking at the news, the “transitory” inflation as they call it has made their inflation prediction to 4.2% from 3.4% just last June. Given the target rate of 2%, even a rosy forecast of 2.2% for 2022 is still higher than the target rate, and is all growth based on a very large number in 2021. In other words, inflation may slow down, but prices are NOT going back down to where they were, no matter what people have said that the market would return once everyone went back to work, and the supply chain was restored. I’m not sure who believes that thought process.

The FED “Dot Chart” a forecast that has always been far from reality when it comes to predicting the future, anticipates 6 or 7 rate hikes through 2024, and with the beginning of the “tapering process” likely to begin shortly, get your refinances in and locked before the opportunity slips away. While rising mortgage rates won’t hurt purchase business all that much as far as total transactions go; it will be a mixed bag of good news and bad news. FHA, VA, USDA, Bond Programs, and down payment assistance loans will come back in style, and while much of the multiple offer situations should dissipate, welcoming back these buyers, don’t be surprised if all cash deals remain strong.

Keys to watch will be the September Jobs report and the inflation report shortly thereafter. These numbers may delay the FED reaction by a month or so; but don’t be surprised if the FED lets the markets figure it out for themselves sooner rather than later! 

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