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Failed negotiations could jeopardize buyer's financing

Ilyce Glink
Inman News

Q: My daughter is in the process of buying a foreclosed home and she is obtaining an FHA-insured loan. There are several repairs that FHA is requiring be made before closing.

The real estate team handling the sale for the bank told my daughter's real estate agent that she is responsible for the repairs that must be made before they will fund the loan. They said my daughter would be allowed to roll the cost of the repairs into her loan.

My husband and I wonder who is actually responsible for the repairs. It is a foreclosure, but since the bank is the current owner, wouldn't they be the ones to pay?

A: Normally, a buyer can negotiate FHA-required repairs with a seller. If the seller refuses to make repairs, the buyer could walk from the deal. But in a foreclosure situation, I don't believe that lenders have to assume the responsibility for getting the repairs completed. It sounds like they have decided not to do anything and allow the buyer to fix up the home.

Unless the home is being sold to you "as is," you could ask the lender/seller to reduce the price of the property further to cover the amount of the repairs. If you get that price reduction, you could then make the repairs and finance them into the loan. Be prepared for the lender to say "no" to this plan.

At that time, you daughter will have to decide if she wants to make the repairs or walk away from the purchase. If she is getting a great deal on the home, my sense is that she should probably go ahead and make the repairs if they're not too extensive or expensive. But if it's a $30,000 repair on a cracked foundation, then she might want to rethink the purchase.

I hope your daughter has her own agent representing her in this purchase and if not, I strongly urge you to find her an excellent real estate attorney who can make sure she is protected.

She can find a good attorney (not the bank's attorney, but her own counsel) through your local bar association.

Follow-up: I got an e-mail back from the buyer's mother who said that the lender again refused to pay for the cost of repairs. But since the repairs will cost only $800, the daughter has decided to proceed. ...CONTINUED

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Q: I'm confused about annual percentage rates (APRs). I'm three years in on a 30-year mortgage. The APR on the loan is 5.875 percent. My bank is now offering 5.45 percent APR.

I am wondering if it is worth the effort to refinance my loan. I already pay an additional $300 per month toward the principal balance. Will I save money by refinancing?

A: Probably not at the interest rate you've quoted in your e-mail. If you can't even lower the interest rate on your loan by a half percentage point, it will probably take you several years to pay off the refinance closing costs. For example, if you save $50 per month but it costs you $3,000 to refinance, it would take you five years to pay off the closing costs with the savings. While that sounds good, it really isn't.

The only way this would work is if the interest rate drops lower (as I was writing this, the 30-year mortgage rate fell again to just about 5 percent), and you can shave a full point or more off of your interest rate. Or, if you can refinance your current balance to a 15-year mortgage with an interest rate of 4.5 percent or lower, you'll shave years off of your loan term and pay a lower interest rate.

But by paying $300 per month extra, or $3,600 per year, you've already effectively cut the term of the loan by a significant amount. For example, if you make one extra payment a year, you'll shave eight years off of your loan term, and pay off the loan in about 22 years. If you make two extra payments per year, you'll pay off the loan in 18 years. If you're making three extra payments per year, you'll save even more in interest because you'll get the loan paid off that much faster.

So, spending $2,000 or $3,000 to refinance when you're already on a great path doesn't make much sense unless you're cutting your loan term to 10 or 15 years in length. Then, refinancing might make some sense.

Q: My husband has a credit score of 470. We checked it and found that he is listed twice as not paying his auto loans. Can we still get approved for a mortgage of $74,000 with $25,000 down?