Financing an As-Is Home

It is common to think that accepting a property “As Is” means that the buyer may not get an inspection or negotiate the terms. However, this is not true. Buyers and sellers may still negotiate over the details of an inspection with an “as is” contract. However, with an as-is purchase, the bigger problem is often trying to get a conventional loan to buy the property. Let’s look at financing an as-is home and what possibilities exist in the Lone Star state.

Understand Your Purchase Contract

First off, it is essential to understand your real estate contract. If you accept the property “as is” (under Paragraph 7D (1 & 2)), you may still get an inspection and work with the seller to negotiate repairs during an option period. 

Perhaps the home has a crack in the basement wall, or a faulty chimney flue that needs repair. Unless you have already agreed in writing to pay for any repairs needed, you can opt-out of the contract if the repairs are more than your budget can handle.

The option period is the key to backing out of the contract if needed.

Lender Financing an As-Is Home

Many lender’s loans are contingent on completed repairs before closing. Depending on who your lender is, there may be extensive repairs required or none at all. However, no matter what is wrong with the home, neither you nor the seller must pay for lender-required repairs (unless they have agreed elsewhere in writing). 

If you both opt-out due to lender-required repairs, the seller returns earnest money to you. Sometimes the seller wants to make repairs to satisfy the lender, but the cost of repairs is more than 5% of the home value. When this is the case, you can terminate the contract anyway. If the house needs more than 5% of its value in repairs, it may not be worth buying.

For example, if the home is worth $250,000, but an inspection during the option period shows a moldy subflooring in the basement. Let’s say the seller gets an estimate for repair that is more than $13,000. As a buyer, you might be suspicious of a house that needs this much work. In this case, you can terminate the contract.

Lender Requirements

Lenders will typically not lend to you if the home is not livable. They base their standards on an as-is value. If the house is a disaster and needs large amounts of work, the as-is value is low.

Lenders generally require a home to meet minimum property requirements (MPRs). Therefore, when the appraisal comes, it must meet the minimum property requirement standard for that particular type of loan. 

FHA Loans

FHA loans tend to be a bit more lenient on the standards they expect a home to have. The house must meet minimum property requirements, but beyond being structurally sound, they are not as worried about appearance-only defects.  FHA requires any repairs necessary to preserve the property’s continued marketability and protect the health and safety of the occupants. Appraisers look at many different aspects of the design and building materials to determine whether the home meets the MPRs for the FHA program. Those MPR’s require further inspection if there is:

• Standing water against the foundation
• Excessively damp basements
• Hazardous materials on the site or within the improvements
• Faulty or defective mechanical systems
• Evidence of structural failure (e.g., settlement or bulging foundation wall, unsupported floor joists, cracked masonry walls or foundation)
• Evidence of possible pest infestation
• Leaking or worn-out roofs (2)

USDA Loans

If you live in a rural area where the federal government is building the community, you can see if you’re eligible for a USDA loan. This loan program also has requirements to qualify, including:

• Structurally sound foundation and roof 
• Newer electrical system
• Functional heating and cooling systems
• Suitable plumbing and water pressure

VA Loans

VA loans are specifically for veterans and active-duty military. The minimum property requirements (MPRs) for VA home loans include:

• Sufficient space for living, sleeping, cooking, dining, and sanitary facilities
• Safe water and good drainage of soil away from the house
• Working water heater and sewage system
• Free from hazards to occupants
• Defective construction, poor workmanship,
• Evidence of continuing settlement
• Excessive dampness, leakage, or decay
• No insect infestations or pests
• A permanently installed heating system that maintains home at 50 degrees or more
• Mechanical systems in working order
• The roof must be in good condition
• Modular and mobile homes may have additional requirements

Conventional Loans

A conventional mortgage is one that’s not guaranteed or insured by the federal government. However, many traditional loans meet the criteria set by Fannie Mae and Freddie Mac because they purchase mortgages from lenders and sell them to investors. 

If there are only minor problems or deferred maintenance, but the house is otherwise safe, then the lender may loan to you. Examples of what might be considered acceptable for a conventional loan include:

• Missing handrails with no safety threat
• Holes in window screens or cracked window glass
• Defective interior paint surfaces in housing built after 1978
• Minor plumbing leaks that do not cause damage
• Other inoperable or damaged components that don’t pose a heath or safety issue (2)

The takeaway is that “most lenders aren’t going to finance a fixer-upper with a traditional mortgage. After all, they aren’t going to approve a loan for more than the home’s current value.” (1)

If you are trying to buy a home as-is because you want to save money, it is possible to get a loan for a fixer-upper, but in general, you must meet the minimum property requirements for the loan program you want to use. 

It is always wise to work with a real estate attorney who can look over contracts and ensure that your option period is truly a time when you can back out if needed. Texas real estate contracts can be complicated, and it’s hard to know who is on your side sometimes. An attorney is always on your side working in your best interest.

We Can Help

At Jarrett Law, our primary focus is on real estate law and keeping your best interest top of mind. We understand that buying a home is probably the most significant investment you will ever make. We know the risk you take when you sign a purchase agreement. Let our real estate focused team ensure that you are legally safe from those who would try to take advantage. Contact us today and find out how we can help you get into the home you’ve always dreamed of without the anxiety of wondering if you’re doing the right thing.