Thursday, September 15, 2011

MORTGAGE & FINANCE: Lenders are Looking More at the Condition of the Property

It is pretty well known these days that mortgage applicants are liable to undergo scrutiny more thorough than just about anyone in the business can remember. I don’t know about the rest of the country, but in our neck of the woods (Orange County, California) we are also seeing the emergence of a parallel trend. Not only are borrowers getting a more thorough examination, but also the properties themselves are being scrutinized as never before.

I am not talking about the value of the property -- those kinds of appraisal issues have been with us for some time now. Today, I am referring to the physical condition of the property.

FHA and VA have historically been more stringent than conventional lenders with respect to issues such as peeling paint, unpermitted additions, and non-fully functioning appliances. Nowadays, though, it seems just as likely that a real or perceived deficiency in the property’s physical condition may cause as much of a problem for a conventional loan as for one that is FHA or VA.

I am not complaining that there is anything wrong with this. Certainly, the institution that is putting up the lion’s share of the money has a right (perhaps even an obligation to investors) to require that the security for the loan is in acceptable condition according to its own standards. But it is something that agents need to be aware of as the loan process is working its way towards funding.

Critical consideration of property conditions may occur at one or both of two stages in the loan process.

1. At the appraisal stage: it’s tough enough having to deal with distressed property comps, additionally, agents can no longer rely on appraisers just to measure the property, draw a floorplan, and leave. Sometimes they are liable to conduct their own mini-inspection – checking out the roof, looking in the attic, flushing toilets, randomly checking appliances, etc. Malfunctions or deficiencies may not affect evaluation, but, if flagged, correction may become a condition of loan approval.

2. At the underwriting stage: it is becoming more common for underwriters to probe into the
property condition as well as the buyer’s finances. Here, it is not just the appraiser’s observations that receive attention. An underwriter may, for example, ask to see a copy of the home inspection. An underwriter may also want to see what the seller has disclosed to the buyer about the property’s condition and history.

In California it has become common for a buyer to ask a seller to provide a four-page form known as the Seller Property Questionnaire (SPQ). The SPQ was created by the California Association of Realtors® (CAR). It is considerably more detailed and informative than the state-mandated Real Estate Transfer Disclosure Statement (TDS). Although not required by law, provision of an SPQ is often called for as part of the purchase agreement between buyer and seller. What is happening now is that, sometimes, underwriters are asking for a copy of the SPQ.

Why might this be a problem? Suppose the disclosure revealed a roof leak in one corner of the three-car garage. It would cost $1,500 to fix. The buyer appreciates the disclosure, but he doesn’t care because he is going to remodel the garage and put a loft room –with a new roof – over that corner. The underwriter says, “No, it must be fixed before we will approve the loan.”

Life’s little challenges. It’s part of what makes real estate so much fun.

Bob Hunt September 6, 2011

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