Why won't a buyer's lender approve this loan?

Just after seven on a Tuesday morning, I get an urgent call from our client Jim who is buying a house in Oak Park. Other than the worry in his voice, the transaction is going smoothly and we are on track to close in three weeks.

He tells me, "Hey Mike, The lender is saying there is a problem. They say I cannot buy the kitchen island. They want it removed from the contract."

Taken at face value, this is a serious concern. The kitchen has come up in every conversation I have had with Jim. He is an avid home chef who entertains friends and co-workers regularly. The kitchen is beautiful. And the custom island has hidden wheels, so it's ideal for cooking and entertaining.

Jim says emphatically, "Mike – I'm already paying over the asking price. I love the island and can't imagine having to give it up. Why on earth won't the lender let me buy the island?"

"No worries," I respond. "I know the perfect solution to fix this." As soon as we hung up, I put my plan in motion to help Jim get his island.

First, what does a home purchase include? As expected, purchases include the walls, roof, and floors. The land below, too. Collectively, we refer to the land and the improvements as real property. But the purchase and sale also include various fixtures and items of personal property – appliances like the stove and refrigerator. The AC and furnace. The toilets, sinks, showers, faucets. Lights, ceiling fans on so on. These are fixtures and personal property. Standard real estate contracts have a long list of possible inclusions and check boxes are used to document what stays and goes.

But a moveable island is not on a standard form contract's list. Jim wanted the island badly enough that he directed his real estate broker to write it in.

So, why won't the lender let Jim buy the kitchen island? Lenders only want to lend money to buy real property and the fixtures necessary to make a home habitable. They are willing to allow anything that is printed in on the standard form contract. There is fear however that a moveable/removable element of the house may reduce its value. Taken to extreme, moved objects may lower the property value to a level unacceptable to the lender.

Furthermore, the lender does not know what the island is worth and does not want to waste time to make a determination. Excluding it from the sale eliminates the lender's perceived risk. Far easier to value the property for underwriting without mentioning that island at all.

My solution adds a contract amendment that references the kitchen island as included in the sale, but also agreeing that it has "no monetary value." That assures Jim that seller will leave it for him. It allows the lender to go forward with an appraisal and loan underwriting that does not take it's value into consideration at all.

Jim and the seller sign the contract amendment, then I submit it to the lender... and we close on time as planned. Jim is thrilled with his new home and kitchen. And I am invited for dinner to celebrate his success. 

If you're buying or selling real estate in the Chicago area, schedule a call with us to see how we can help.