Sometimes when you buy a new home you find termite damage, termite infestation, or both. When applying for a home loan termite damage is of course unwelcome news, and the lender will want to see the issue resolved before allowing the loan to go to settlement. However, there are solutions to avoid disrupting the mortgage process.
The most immediate solution is for the seller to repair the termite damage or treat any termite infestation prior to settlement of the loan. After the work is completed, the lender will require a copy of an invoice showing that a licensed contractor completed the necessary treatment and/or damage repair. However, many times a seller does not have the money, or there is not the necessary time per the contract prior to settlement to allow for this work to be done. In that case, an alternative plan is needed.
What is a seller credit?
If the seller cannot do the work in time it is necessary for the seller to give the buyer a “seller credit.” A seller credit is the amount of money the seller will pay towards the buyer’s closing costs. This seller credit would equal the amount of the termite repairs, and then the buyer would pay reduced closing costs at settlement, take the money from the credit, and do the repairs on their own after settlement. It is important to note that any seller credit would need to be written up in a contract addendum, and the addendum could not mention that the seller credit is in lieu of repairs. It would simply state that the seller agreed to give the buyer a seller credit of a certain dollar amount. For more information on getting a seller credit in lieu of repairs.
Another solution would be to simply reduce the sales price by the amount of the repairs. This would also need to be agreed to and signed off on in an addendum to the sales contract. However, the downside is that this does not put immediate cash into the pocket of the buyer, and when it comes time to fix the termite damage after settlement, the buyers would have to take this money out of their own pocket. Reducing the sales price saves the buyer money over time, but it does not immediately put cash in their pocket like reducing their closing costs would with the aforementioned seller credit.
It is important to note that sometimes in a competitive environment that favors sellers; the buyer may waive a termite inspection in the sales contract to present a more attractive offer than a competing offer. In this case, this entire blog discussion becomes a moot point, and the buyers will find themselves paying for any termite repairs on their own.
It is also relevant to note the Fannie Mae and Freddie Mac rules for termite inspections say that if the sales contract has a termite inspection clause, and if that clause is stricken from the contract, they will not require a termite inspection at all. In this case, buyers will find themselves paying to fix any termite damage or termite infestation on their own. However, if a termite inspection fee shows up on the HUD-1 Settlement Statement for any reason, the lender will require a copy of that termite inspection. If the inspection shows that there is termite damage or infestation, the lender will require the repairs to be made prior to settlement; simply having a seller credit from the seller to the buyer would be insufficient.