The Timing of a Home Inspection Could Impact Your Client’s Mortgage Commitment

A Reminder from Gary Siegle, Mortgage Broker Regulatory Compliance Advisor

Home inspections are a part of nearly every offer to purchase. Did you know that the timing of a home inspection could have an impact on your client’s mortgage commitment?

RECA has seen an increase in calls about deals collapsing due to financing falling through after a home inspection changes aspects of a deal. Real estate and mortgage licensees should inform their clients of how home inspections could impact their financing, and how the timing of an inspection could be the difference between a deal closing or collapsing.

Here are some scenarios that illustrate why it’s important to know when a home inspection is completed during the property sales process and how it can impact the deal for both the seller and the buyer.

Scenario 1: Home Inspection After Financing is Approved

What happens when a home inspection is completed after financing is approved? During the home inspection the inspector could identify issues with the property that may lead to a price reduction and/or a holdback for the seller. This could lead to the seller being required to complete work on the property prior to closing. However, the buyer does have the option to waive financing conditions making it a firm sale.

Depending on what option the buyer takes, they would then be required to submit the revised purchase terms to their lender. This could lead to various lender reactions:

• the lender could request a copy of the home inspection or request a separate report to identify any additional risk concerns
• the lender may request an appraisal, which could change the lending value, resulting in the lender changing the financing amount and requiring a higher down payment
• the lender may decline the new terms completely

There is no certainty that a lender will approve any changes that are being made to the borrower’s mortgage commitment. It is important to know that the revised terms of financing may make it impossible for the borrower to close, and they could lose their deposit altogether, resulting in the deal collapsing.

Should work be required or new terms be required to be sent to the lender, the buyer might opt to delay waiving the financing condition. Delaying gives the buyer better protection and more options. The seller will have to agree to any extension to the condition deadline.

If the buyer accepts the revised lender terms, they can waive the financing condition, making it a firm sale. However, if they do not accept the revised lender terms, the financing condition would not be waived, and the buyer’s deposit is returned.

Scenario 2: Home Inspection is Completed Before Financing Application is Sent to the Lender

Before the financing application is sent to the lender, an initial offer is accepted by the seller. In this scenario the buyer would then immediately have a home inspection completed. If issues arise during the home inspection that result in a price reduction and/or holdback, the seller could be required to complete work prior to closing.

If this happens the initial offer would be revised, and the purchase terms would then be submitted to the buyer’s lender for the first time. The lender would establish the terms of their financing based on the full knowledge of the property’s condition. The financing conditions would not be revised as in the previous scenarios as this is the first application.

If the lender terms are accepted by the buyer, they would waive the financing condition and make it a firm sale. However, if the lender terms are not accepted the financing condition would not be waived, and the buyer’s deposit is returned. In all situations the key thing to know is that a home inspection could have significant impact on a deal. It’s best to stay informed about the timing of your clients’ home inspections so you can help them avoid a scenario where the lender changes the loan terms or backs out making it impossible for the buyer to complete the transaction and therefore lose their deposit.