FINANCING THE “AS-IS” HOME PURCHASE

By
Real Estate Broker/Owner with Realty One Group

The loan approval from your bank or mortgage lender to finance a home purchase may not include many homes for sale in "As-Is" condition, so it is critically important that you recognize this before committing yourself to a purchase contract.

Several purchase contracts have failed to close recently due to various banks and mortgage lender's refusal to finance homes in serious disrepair.  Many of these homes are classified as homes listed for sale in as-Is condition, and likely could still have had a successful closing provided that the correct method of financing the purchase was in place from the beginning.

When a buyer first makes application for a mortgage loan, it is critically important that they inform their loan officer what their intentions are in terms of the type of home they intend to purchase.  Your loan officer can address what types and conditions of homes are acceptable to their lending guidelines.  Homes in serious disrepair are less likely to get approval from most banks, and several mortgage lenders will likely consider financing a home in need of repairs, provided that escrows are set up to ensure vendors and contractors are compensated once the necessary repairs are completed.

Why consider the purchase of a home in as-is condition?

Homes for sale in as-is condition tend to be priced more competitively, given the current condition of the property.  The tricky part is getting the right financing to purchase a home in as-is condition, so it is very important that you understand what a home in as-is condition is, and how to successfully secure a purchase contract for a home and also get the right financing, the first time.

Unlike homes for sale where a seller has offered a Seller's Real Property Disclosure that allows the seller to disclose defects or facts that materially affect the value of the property but may not be readily observable to a buyer, a seller will typically a home for sale in as-is condition due to either the fact that repairs need to be completed but not by the seller, or the seller may have little or no immediate knowledge of the property' condition, as in the case of many investors.

In most cases, banks and mortgage lenders will offer financing for most of these homes, provided of course that all necessary repairs are completed PRIOR to funding the purchase.  In some cases, a mortgage lender may allow for the escrow of funds for the repairs to be completed after the loan closing, with the bank, mortgage lender, or Title Company directly responsible for the disbursement of the funds needed to complete the repairs for the home.

Why is this important to know?  The loan approval that you receive from your bank or mortgage lender will determine whether the repairs need to be complete prior to your loan closing, and if they will allow for funds to be held in escrow to complete these repairs.

For example, FHA and VA mortgage loan programs will require all necessary repairs be completed prior to the loan closing.  Examples of necessary repairs are typically related to structural issues such as the roof on the home, cracks in the foundation or walls of the home, or other issues that may not make the home immediately habitable. All of this is subject to the individual mortgage loan underwriter.

Often times a home may be listed for sale in "as-Is" condition simply because of cosmetic issues, such as paint, soiled carpeting, poor landscaping, etc.  Most mortgage loan underwriters will likely overlook these issues, depending on their severity.

Currently, there are over 1200 homes for sale in our local Multiple Listing Service that are being offered in "As-Is" condition, with almost 400 of these homes classified as "repaired', likely from the damage incurred from hurricane Charley.  Other homes for sale ‘as-is' appear to be in good condition, with many others in need of serious repair.

Before you sign a purchase contract for a home in as-is condition, you should consider getting all of the facts upfront, especially on how a home purchased in as-is condition directly affects your loan approval.  Find out what your bank or mortgage lender considers ‘acceptable' condition for a home that they would finance.  Again, most banks and mortgage lenders will require all necessary repairs to be completed prior to a loan from closing.  If the repairs are extensive, you may want to discuss this with your real estate professional, as the sale of the property could hinge on the repairs being completed, and the seller may opt to complete those repairs just to get the sale completed. 

Consider hiring a home inspector to inspect the home first before signing a purchase contract.  You may find that the repairs needed to make the home habitable may be too expensive, and will likely have an adverse affect on securing the financing that you need to complete the purchase of the home.  The cost of a home inspection could be money well spent, especially if it helps the buyer recognize the costs associated with purchasing certain as-is homes in need of repair. 

If you do sign a purchase contract first prior to a home inspection, consider using a purchase contract that gives you an out from having to purchase the home if the cost of the repairs exceeds a certain dollar amount.  If you only have $2000 to complete the repairs and the cost estimates for the repairs are over $2000, you may be able to negotiate this with the seller for the difference, or simply opt out of the purchase agreement.

Purchasing a home in as-is condition requires special attention, especially when it comes to financing the purchase of a home in as-is condition with a bank or mortgage lender.  Recognizing the potential pitfalls with financing a home in as-is condition can save the buyer from needless headaches, costly repairs, and unnecessary mortgage loan denials.

For a free copy of the Seller's Real Property Disclosure Statement, please contact 941-206-6000.

 

Mike Sikorski, GRI
Licensed Real Estate Broker

Licensed Mortgage Broker

Loss Mitigation Specialist

Florida Realty Network LLC

22079 Kimble Avenue

Port Charlotte, Florida 33952

Phone 941-206-6000

Email: Mike@FloridaRealty.net

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