Property owners need to ensure their property is in good condition before committing money to the purchase. If you’re looking to invest in a strategic rental property, it’s not enough to settle for a house in a great location with the right amenities. Without due process, you could buy a money pit that requires a lot of renovation and cosmetic changes that deplete your funds. That’s where lender inspections come into the picture. As a common requirement of the loan approval process, they’re a great opportunity for lenders to ensure that the property meets their loan standards while allowing borrowers to run a second check. Read along this article as we dissect the nitty gritty details of  what is a lender inspection:

Primary Purpose of a Lender Inspection

1. Assess Current Property Conditions

Confirm that your prospective property meets your lenders’ criteria for a loan. It’s common for lenders to have a minimum standard for the things a house must have before investing their money in such a project. It usually includes checking for structural issues to ensure they’re not throwing their money into a home with more liabilities than assets.

2. Determine Property Value

Find out your property’s true worth after a lender inspection. It’s one thing to know the market value of your rental post-repair, but ultimately your lender has to agree with that assessment. If they value the property lower than your estimations, it could mean reduced funding affecting your purchase and renovation plans.

3. Perform Risk Assessment

See where your property falls on the risk assessment scale. Lenders tend to be wary of high-risk investments, even when there are signs of promising returns. For instance, an old, worn-out rental that needs a new roof, a wiring system, and a fresh coat of paint would be a high-risk venture because you’d have to spend a small fortune on getting the house in shape. So, if you’re a first-time investor without a viable exit strategy, you may not have enough confidence to get a loan approval.

What Areas Do Lender Inspectors Check?

Lender Inspection

Compliance With Safety Regulations

Pay close attention to your rental’s compliance with safety regulations. Lenders often look for signs of neglect or potential hazards that affect a property’s safety to determine whether it’ll be a good investment. If your property has too many flaws like non-functional smoke detectors, obstructions around your fire exit, or poor electrical grounding, the house could fail the inspection. The good thing is that Maryland Hard Money Lenders can assist if borrowers are working on a short timeline after failure to property inspection.

Overall Physical Condition of the Property

Examine your property’s physical condition to identify any major defects. It’s common for lenders to perform a thorough exterior evaluation of the rental to assess its potential repair needs and risk level. Prepare to have someone check major structures like your foundation for stability and your roof for leaks. Additionally, these inspections often extend to the home’s interior and could include testing the water pressure, inspecting pipes, and verifying that the heating and cooling systems are operational.

What is the Impact of Inspection Process on Amount Financed?

1. Value Assessment

Find out the property’s appraisal value following your lender’s inspection. If your inspection shows that the property is in good condition, with no major defects, it’ll have a high appraisal value and lenders will be more willing to offer a larger loan amount. On the other hand, houses with too many issues would have a lower appraisal value, and if it’s too low you could even get a rejection. There are multiple reasons a loan application may be rejected after inspection so it’s important to be prepared for the results.

2. Loan-to-Value Ratio

Calculate your loan-to-value (LTV) ratio by dividing the loan amount by the property’s appraisal value. For instance, if you apply for a loan worth $80,000 to buy and renovate a property with a market value of $100,000, at 80% that’s a high LTV ratio. It also means the lender has to finance the bulk of the project, which is a high-risk venture for them and could mean higher interest rates for you. On the other hand, if you only need the lender to front you $50,000 to purchase and remodel the same project, that means your LTV ratio is 50%. Thus, lenders would be more likely to give you approval, knowing you have a larger equity stake.

3. Require Renovation

Upgrade your rental property to improve your chances of getting a loan approval. If inspections reveal that there are too many faults with your property, it could be off-putting to lenders because they consider it a high-risk investment. However, rather than turning you down, some lenders could request that you make specific repairs within a specified timeframe so they can reevaluate your property’s eligibility for a loan.

Conclusion

Anticipate lender inspections as part of the loan approval process. The last thing any lender wants to do is invest money in a dilapidated rental that requires more funds to rehabilitate than it’s worth. As a result, you can save yourself a lot of time by ensuring your prospective property meets the lender’s standards. By verifying that the property follows appropriate safety regulations and is in good physical condition, you could earn more leverage during negotiations that allow you to get better interest rates or a higher loan-to-value ratio.