SANTA CRUZ (October 12, 2008) - Contrary to popular belief, as a general policy, lenders do not require inspection reports on the homes they finance. As we all know, this lending climate demands much detailed documentation from the borrower regarding job stability (where have you been working for the past two years and why did you have that job gap?), income (two years of W-2s or tax returns and current paystubs), assets (two months of all of the pages of your bank statements) and credit history (a detailed history that reports derogatory credit for up to 10 years).

The lender relies on a state-licensed appraiser to determine the value of a property and sees the property through his (her) eyes. Most appraisers are independent, fee appraisers and are hired by the lender to determine the fair market value of the subject property. Appraisers are not only concerned about the value of the property but also the condition, the age, the functionality, compatibility with the neighborhood, etc.

While appraisals have a subjective side to them, solid appraisals from reputable, experienced appraisers should reach similar conclusions with respect to value. Appraisers with limited experience or appraisers who are simply trying to satisfy their customers may not put adequate time, research or attention to detail into their work and, therefore, the validity of their results is questionable.

Under the pressure of flat or falling values we are seeing some refinance situations where, on first glance, the appraisal confirms the expected value of the home but a subsequent review by a second appraiser uncovers the fact that the original appraisal left out critical information that affects the true value of the property.

In these times investors are paying particular attention to values and sometimes require a second appraisal. This is especially true for refinance loans, regardless of loan amount, that are requesting high loan-to-value ratios.

In the past we have had to ask the buyer to provide inspection reports for at least water wells and septic system inspections for rural properties and some lenders also used to require pest inspections; however, today unless the purchase contract calls for a clearance or unless the appraiser makes note of “infestation” or such things as worn out roof, water damage or cracked foundations, lenders are not requiring inspection reports.

The standard California Association of Realtors purchase contract allows the buyer 17 days “to complete all investigations and approve all disclosures, reports and other applicable information”. The precise time frame for this contingency is negotiable. During that period the buyers are well advised to conduct or order their own inspection reports in order to understand and determine the condition of the entire property, including the well, septic system, heating system, plumbing, etc.

Should the buyer find areas of concern in these investigations, he or she may attempt to re-negotiate the sales price and terms of the sale and/or ask the seller to perform repairs. The seller is under no obligation to agree to respond to buyer’s requests and the buyer may either decide to either accept the property in its present condition or back out of the purchase contract altogether.

Buyers are well advised to thoroughly scrutinize the condition of the property prior to releasing their contingencies. Home buyers and refinancing home owners can expect increased scrutiny of appraisals prior to granting the final loan approval.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.