When seeking a traditional mortgage, you’ll likely need to deal with repairs required by the lender. But, first-time homebuyers and new investors frequently ask me about responsibility. That is, who is responsible for lender required repairs, the seller or the buyer?
Neither the seller nor buyer is responsible for lender required repairs. They are completely negotiable. In some deals, the buyer will cover all repairs. In others, the seller will. Sometimes, they split repairs evenly. Repair responsibilities will be decided in each individual deal’s negotiations.
I’ll talk more about lender required repairs—and who’s responsible for them—in this article. Specifically, I’ll cover the following topics:
- An Overview of Lender Required Repairs
- Who is Responsible for Lender Required Repairs?
- Lender Required Repair Options for Buyers and Sellers
- Final Thoughts on Lender Required Repairs
An Overview of Lender Required Repairs
Before discussing responsibility, I need to provide an overview of lender required repairs. With traditional mortgages, lenders have minimum habitability standards. In other words, they’ll only provide loans for properties that a borrower can move into immediately. This differs from hard money lenders, who provide loans for distressed properties in need of significant repairs.
Due to this habitability requirement, lenders often mandate that certain repairs happen before they approve a loan. Banks, credit unions, and other traditional lenders don’t actually go out to properties to physically inspect them. But, they do require appraisals. And, while an appraisal differs from a home inspection, appraisal reports highlight major property issues.
For instance, if a home’s basement has a ton of standing water from a leak, the appraiser will highlight that in the report. Or, if a house has significant mold or rot, the appraiser will absolutely note those issues. Major paint peeling, roof issues, faulty wiring, and plumbing problems are some of the other common issues that show up in an appraisal report. And, if homes have had major renovations in the past, this could cause some appraisal red flags. Lenders will want to see a paper trail to confirm that any renovations received the proper permitting. If not, the process of retroactively applying for and receiving permits can be a lengthy one. While not a repair, per se, it’s important to understand how faulty – or no – permitting can trigger a lender requirement.
When lenders review these appraisal reports and note major issues, they’ll add a condition to the loan closing. That is, before providing final loan approval, these repairs need to be completed. Finishing the repair removes the loan approval condition, and lenders will move forward with the closing process. As such, here’s the important takeaway: if someone doesn’t complete these required repairs, the lender will not approve the loan.
Who is Responsible for Lender Required Repairs?
Clearly, if you want to close on a loan, lender required repairs matter. But, who’s actually responsible for completing these repairs—the seller or the buyer?
Trick question. No one’s responsible for these repairs. And at the same time, everyone is responsible for them. Bottom line, lender required repairs are 100% negotiable between the buyer and the seller. Someone needs to do them, but who that someone is will depend on the specific deal and the negotiations between the buyer and seller.
Lender Required Repair Options for Buyers and Sellers
Depending on the particular deal (and often the broader market conditions), buyers and sellers generally settle on one of the below options for assigning repair responsibility.
Option 1: Seller Pays for Everything
In a buyer’s market, the buyers have more negotiating power. This may put them in a position to demand that a seller pays to address all of the required repairs. For a buyer, this obviously represents the ideal solution.
Option 2: Buyer Pays for Everything
Conversely, in a seller’s market, sellers have the upper hand in negotiations. As a result, a seller may refuse a buyer’s demands to complete necessary repairs. In this sort of environment, if one buyer falls through, another one will likely step up—and be willing to complete the required repairs. Sellers obviously prefer this option, as it maximizes their profits.
Option 3: Seller and Buyer Each Pay a Portion
In some situations, the buyer and seller may both want the deal to move forward without either having a clear negotiating advantage. As a result, the best solution may be compromise. For instance, they could agree to have the buyer replace missing flooring tiles in a bathroom, and have the seller replace the home’s missing stair rails.
Option 4: Seller Pays for Repairs but Raises Contract Price
This is another compromise option. In some situations, the buyer may want to cover the required repairs to make the deal happen, but he or she doesn’t have the cash on hand to do so. Instead, the seller can pay for the repairs but raise the contract price for the cost of those repairs. This creates the same endstate for the seller. That is, the buyer pays for all the repairs. However, rather than needing to pay out-of-pocket for these repairs, the buyer finances them with a larger loan.
Of note, this option comes with the possibility of a home not appraising at the new, higher contract price. Consequently, buyers and sellers should take caution when using this approach.
Option 5: Any Variation on the Above Options
At the end of the day, buyers and sellers can do whatever they want. Maybe the seller pays for 25% of the repairs and the buyer pays for the other 75%. Or, the seller can raise the contract price to cover half the repairs, and the buyer can pay for the other half out-of-pocket. As long as they complete the repairs somehow, the lender will approve the loan.
Option 6: Buyer Walks Away
This is the “nuclear option” of repair negotiations. If the buyer and seller simply can’t agree on how to assign responsibility for required repairs, the buyer can walk away from the deal. Obviously, this doesn’t represent a great option. Both parties have already committed a ton of time, energy, and money into the sale—all wasted if it falls apart. But, sometimes this represents the only good option for a buyer.
Final Thoughts on Lender Required Repairs
Buyers, sellers, and real estate investors in general need to fully grasp this: if lenders require repairs, they won’t approve a loan until someone completes those repairs. Some sellers believe this provides them an upper hand in negotiations. However, sellers should consider that if one lender won’t approve a loan closing, others may not as well. As such, it may make sense to just come to some deal with the buyer to complete the repairs—even if it’s not the ideal option.
The unique situations of the seller and buyer will certainly impact these negotiations. A desperate seller in need of cash will likely cover any and all repairs to close a deal. Similarly, a young couple who’ve fallen in love with a home may offer to cover anything just to buy their dream home. However, outside of these more extreme scenarios, most negotiations will largely depend on the broader market and whether it favors sellers or buyers. By working with a savvy real estate agent, you’ll be able to negotiate the best outcome for covering lender required repairs—as a seller or a buyer.