Co-Author: Brad M. Lund, Esq.
Who has the responsibility for making the FHA inspection disclosure notice to buyers: listing brokers, selling brokers or lenders? What are the consequences if the buyer does not execute such a disclosure?
Technically, the lenders have the obligation to make the disclosure. However, real estate brokers should monitor timely execution of the disclosure to avoid the possible need to re-execute the contract.
Some of you may already be familiar with the recent FHA form entitled, “For Your Protection: Get a Home Inspection.” This form is part of HUD’s campaign to “increase the accuracy and thoroughness of FHA appraisals” and to inform and protect homebuyers. Mortgagee Letter 99-18. This form replaces the older form entitled, “Importance of Home Inspections.”
The disclosure informs the Buyer that: (1) FHA does not guarantee the value or condition of the property; (2) an appraisal is not a home inspection; and (3) the Buyer has rights to get a home inspection. The reason for the disclosure is two-fold: (1) to reduce liability of the insurer (FHA) and (2) to inform the Buyer about, and protect the Buyer from, inaccurate valuations of the property. The form merely requires the Buyer to be informed.
The responsibility for presenting the notice is technically with the lender. HUD requires the form to be signed by the homebuyer before HUD insures the loan. Effective August 1, 1999, the revised form must be signed on or before the sales contract is executed for all transactions that will involve FHA mortgage insurance on the property. Failure to have it signed and dated by the homebuyer could prevent or delay the FHA insurance endorsement, and ultimately the entire transaction. “The sales contract must be re-executed if necessary.” Mortgagee Letter 99-18.
Lenders often do not see buyers until after buyers have made an offer. Lenders might not have the opportunity to timely disclose. REALTORS® should monitor compliance as a precaution. Why?
Hypothetical: An hour before closing, the lender informs the Buyer that because the lender failed to timely present the FHA Disclosure form, FHA refused to insure the loan and that the expected proceeds would only be delivered after buyer signed the disclosure form. The rules require the form to be signed on or before the execution of the sales contract. What happens to the first sales contract? Nobody knows. The Buyer may be without financing until she signs the form and re-executes a new sales contract.
Meanwhile, Seller has found a second Buyer who is able and willing to pay more. Seller declines to re-execute the contract with your first buyer.
We do not know how such a dispute between the seller and the first buyer would be resolved. The rule is too new to create precedent addressing whether the first buyer might have negligence claims against anyone, including the first buyer’s real estate broker. (We would argue that the real estate broker was not negligent as the broker had no regulatory responsibility to ensure disclosure.) But regardless of the broker’s responsibility, brokers wish to avoid blown or awkward deals.
It is in your best interest to ensure that buyers timely receive and execute the FHA inspection disclosure. The FHA inspection disclosure rules are one more reason for you to prequalify your buyers.
Brad M. Lund is no longer with the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.