Home inspection contingencies: What you need to know

The first thing to know is that if you put anything:

  • in the contract, or
  • in an amendment to the contract, or
  • in a notice related to the offer

That says something like:

  • “Purchase price is lowered from $200,000 to $190,000 because of the defective roof,” or
  • “Price lowered because of basement issues as detailed in the home inspection”

Your mortgage lender will require those problems to be fixed BEFORE closing.

Can I use an escrow account to fix a defect after closing?

shutterstock_250922995An escrow account is a separate bank account where money is only released for predetermined expenses — in this case, for repairing specific defects. Might seem like a great way to avoid paying for repairs before closing, but an escrow is only an option if the weather prevents the item to be fixed prior to closing.

Need a new roof in January? That can be escrowed. Need a new roof in August, but all the roofers are too busy?  Sorry.

Contact a home loan expert to discuss whether an escrow account is right for you.

Can I use an escrow account for lawn/landscaping work?

Not really — you can only use an escrow account for lawn/landscaping work if it’s winter.

Any funds put into an escrow account for future work has to be accompanied by written bids or contracts. In addition, if those bids total $10,000, we require $15,000 to be put aside in the escrow account as a cushion.

How do I get around the home inspection contingency?

Mortgage lenders will not invest in a property that has defects and safety hazards — but the language you use in your offer to purchase contract makes all the difference.

Bad: “Because of faulty roofing, which is a safety hazard and defect, Seller will pay $5,000 of Buyer’s closing costs.”

Good: “Seller will pay $5,000 of Buyer’s closing costs and pre-paids. Upon acceptance of this amendment, home inspection contingency is waived.”

Tip: DON’T issue a Notice of Defect and proposed amendment simultaneously. Trust us.

That being said, you shouldn’t try to cut corners. Accunet recently received an amendment from a buyer’s agent reducing the home price. Alright, fine. But then it goes on to say, “If Seller agrees to this amendment, then Notice Relating to the Offer will not apply.”

Our experience is that most underwriters will request a copy of the notice, so we asked for a copy. Sure enough, the notice said, “This is a Notice of Defect . . .  the buyer objects to the following defects: Condition of roof.”

This buyer’s agent was trying to save time by giving the Seller a Notice of Defect and a proposed amendment at the same time. By taking this approach, she ended up telling the mortgage lender (us) that there’s a problem with the roof, which the Buyer could’ve otherwise taken care of after closing. 

Contact the mortgage lenders at Accunet for step-by-step guidance on Wisconsin home purchases.

Is it possible that an underwriter would turn a blind eye to a Notice that was referenced in an amendment? 

Only if they were tired or had two martinis at lunch.

The Wisconsin Realtor Association strongly recommends you propose an amendment first, allowing enough time for the seller to respond before to the home inspection contingency deadline.  Then, if the seller doesn’t respond, that’s when you deliver the Notice of Defect. That will either kill the deal, or force the Seller to fix the defect.

The lesson here: First, coordinate with your lender when making big changes to your original offer. And second, giving a Notice of defect should be considered the nuclear option. Be careful before you go down that path. There can be unintended consequences.