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Inspection reports are not always a lender requirement

It has been a long standing myth that lenders require inspection reports before they will approve a mortgage but that is simply not  true anymore. While there are exceptions, inspection reports such as roof or pest or well or septic system reports that used to be standard mandated requirements by lenders are no longer an automatic requirement.

The exceptions include an acknowledgement by the appraiser that there are safety and/or health issues with the home such as rotten porch or stair boards, roofing that looks old (a roof with a tarp over a portion of the roof is a dead giveaway), cracked fireplace masonry, evidence of active pest infestation, etc. When such comments appear in the appraisal the underwriter is likely to request an inspection report from a professional. Even if the appraiser does not comment on an issue, the underwriter may see something in one of the appraiser’s photos that indicates further investigation and if deficiencies are subsequently uncovered, the underwriter may require the work to be done before escrow closes.

Probably the biggest exception to this policy occurs when the buyer states that the offer is contingent upon receiving a satisfactory inspection report on one or more physical aspects of the house such as roof, pest, septic, etc. When this condition appears in the purchase contract, the underwriter will either expect to see the report requested by the buyer or an addendum to the contract that waives the need to review these reports.

Agents should take note that if the Closing Disclosure mentions a payment by either the buyer or the seller for a pest report or any other specific inspection report; the underwriter will require a copy of the report and will likely require any recommended repairs be made prior to the close of escrow.

The lender will order an appraisal of the property but this report should not be considered to take the place of an inspection report(s) by a professional(s). The buyers are well advised to conduct or order inspection reports in order to understand and determine the condition of the entire property, including the well, septic system, roof, heating system, plumbing, etc. It is common for a buyer to make the purchase offer contingent upon a physical inspection of the home within a specified number of days (this time frame is negotiable between buyer and seller) of acceptance of the purchase contract. Should the buyer find areas of concern in these investigations within the timeframes specified in the purchase contract, he or she has options. They are: renegotiate the sales price and terms of the sale; ask the seller for closing cost credits; ask the seller to perform the repairs prior to the close of escrow or cancel the contract. The seller cannot give the buyer money or credit to make repairs as any credits from the seller may only cover the buyer’s closing costs.

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