You and your real estate agent pounded the pavement to find the perfect home. You viewed several different properties and weighed out all the pluses and minuses. The neighborhood fits your lifestyle and the floor-plan of the home is open and spacious. Together with your agent you come up with an offering price based on all of the relevant sold comparable properties in the area and guess what? The seller's have accepted your offer! But this is only the beginning of the home buying process.
One of the most critical stages of purchasing a house is the home inspection. You should never purchase a home without one. The home inspector will go through every square inch of the property to find any defects that need to be addressed. This could range from leaky faucets, to small cracks in the concrete foundation, minor roofing damage, or air conditioning and heating units that are almost at the end of their life span and need to be replaced.
At the end of the home inspection you will get a full report that outlines everything wrong with the home both minor and major. Once you review this report with your real estate agent you can come up with a list of items that you wish for the seller to repair for you to continue on with the purchase of the home. The seller can respond in three different ways:
- Say yes to either some or all of the repairs
- Say no to the repair requests
- Offer to give the buyer a credit in lieu of repairs
Today we will be focusing on the third option that sellers can choose. What is a credit in lieu of repairs? Simply put, it's when a seller offers a monetary credit to the buyer which is equal in value to the cost of the repairs in exchange for not doing the repairs themselves. This value is given to the buyers as a credit which can be applied towards closing costs or taken off of the purchase price of the home at the time of closing.
Some sellers don't want to be bothered by doing household repairs or they simply don't have the money to do them so offering a credit to the buyer is a better option for the seller. However, depending upon the type of loan in which the buyer is using, a credit in lieu of repairs might not be allowed. There are many different loan programs and mortgage lending institutions. Some of these loan programs such as FHA loans will not fund a home purchase without all necessary repairs being completed before the close of escrow.
If a buyer is using a type of loan program that does not allow a seller to simply offer a credit in lieu of repairs then further negotiations will need to be made between the buyer and seller as to which repairs need to be made in order for the buyers lender to fund the mortgage. Unfortunately, if these negotiations are not successful or if the seller is not willing or able to pay for the requested repairs then the transaction cannot move forward.
But canceling a contract because of a dispute in how necessary home repairs can be done isn't beneficial for either party. Since the seller is now aware of faults in their home that need to be corrected they now know most any buyer will need to have the defects addressed. Conversely, it isn't advantageous for the buyer to cancel the contract since they have already paid for the home inspection and they will have to start the home searching process all over again.
When a homeowner lists their home for sale, the overwhelming majority of them are made aware of the fact that most buyers will be asking them to make some repairs due to findings in a home inspection. If the seller is unwilling or unable to address those issues, a credit in lieu of repairs can be beneficial for both the buyer and seller if the buyers lending institution will allow it.
If you are currently a buyer in the market for a new home, make sure to check with your lender and ask if the loan program you qualify for will allow a credit in lieu of repairs so that you are at least prepared and armed with that knowledge when it comes time to negotiate home repairs.
If you are in the market for purchasing or selling a home in Arizona, contact us today. We are here to guide you through the entire home buying or selling process from start to finish.