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Posted 05/25/2007

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How “Repair Credits” To The Buyer Can Sabotage Your Home Sale

When buyers and sellers look for common negotiating grounds, it's common for the buyer to request home improvements to be made prior to the sale.

The request may be phrased in any number of ways:

  • "The hardwood floors are warped and we think the seller should pay for it."
  • "There is a leak in the plumbing that needs to be fixed to prior to moving in."
  • "The roofing reached the end of its life.  It needs to be replaced."

The seller may agree to meet the buyer's demands, but making repairs to a home fixture, such as a roof, isn't convenient while a person still occupies a home.

And this is how the "repair credit" gets introduced into the contract.

A repair credit is a dollar amount granted from the seller to the buyer to be used to cover the costs of the requested repair(s).

For a seller, repair credits offer a way to "pay for" the handyman work without actually going out of pocket; all of the funds for the buyer are taken directly from the home sale's proceeds instead of from a bank account.

Unfortunately, when granting the repair credit, many sellers go about it in the complete wrong way, putting their buyer's ability to acquire home financing for the purchase at risk.

That's because -- as a rule -- lenders do not allow concessions for home repairs to be line-item credited on the final settlement statement.

This is for two reasons:

  1. The lender has no way of knowing that the repair will actually be made by the buyer
  2. The lender has no way of knowing whether or not the repair is actually needed

Put the two together and it raises the red flag we call "Fraud Alert".

The correct way to offer a repair credit is to reduce the home's sale price by the amount of the credit and make that the new purchase price.

In the end, the seller goes home with the same amount of money.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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