Conventional Mortgage Closing Repair Requirements
Once a home is placed under contract and all of the fine-tuning done in the negotiation process, a buyer using a conventional loan has the option to have the home inspected by an independent third party to evaluate any required repairs. Inspections are completed during the buyer's option period, giving the buyer and seller time to negotiate the repair list. If negotiations are not fruitful, the buyer can cancel the transaction and not lose his earnest money. However, once a seller commits to repairs, the loan underwriting guidelines stipulate that repairs must be completed before close of escrow.
Loan underwriters have a responsibility to the buyer to ensure that all parties adhere to the contract for purchase. Thus, when it comes to repairs negotiated and signed by the borrower and seller, the loan underwriter requires that the receipts for repair work are turned into the escrow company and reviewed by the underwriting department to protect the borrower from any unscrupulous actions or consequences of incomplete or improperly completed repairs.
The underwriter and escrow officer on the file act as disinterested third parties to a transaction and have the final say so on whether or not the file meets the standards for closing. If repair work has been satisfactorily completed and receipts provided, the underwriter will give the escrow officer clear to close. However, in scenarios where the seller does not comply with the contract and complete repairs, the underwriter has the option of making the repairs a condition for closing, and halting close of escrow until the seller satisfies the requirements of the contract. Yet, it is important to note that conventional loans do not come with the same stringent requirements for repairs as an FHA or VA loan might.
Repair negotiations on conventional loans are no different from any other type of loan product. Once the inspection report is provided to the borrower and their representation, it is reviewed and pending items in need of repair placed on a contract addendum. That addendum is then negotiated with the seller on what repairs he is required to make before close of escrow. Once the buyer and seller sign the addendum, the addendum is binding to both parties at closing. This means that the seller is required to complete repairs per the guidelines of the underwriting department and contract and that the buyer is obligated to close on the property once repairs are complete. Should the buyer fall short of his contractual obligation, he will lose his earnest deposit and could perhaps be sued by a seller for failure to comply with the contract.
While it is not required, most conventional buyers will have a home inspector complete a reinspection of repairs before closing. The inspector will utilize his knowledge, combined with the contract addendum and receipts to validate all work required was complete. If the inspector finds shoddy workmanship or incomplete items, he will report that to the buyer, the escrow officer and the underwriter. At this point, the underwriter can cancel a closing, even if receipts for repairs are in hand, until the work is properly completed. While repairs and inspections have become commonplace in real estate, conventional loans do not require them.