Buying a new house is exciting! Before you get caught up in the excitement, though, there is one piece of paper you need to make it legal – the Certificate of Occupancy. Without it, you could find yourself without a home to live in, at least legally. Generally, you need this document before you close on your home. If you don’t, you might own a home you cannot live in just yet.
What is the Certificate of Occupancy?
The Certificate of Occupancy is an important document your city issues. Typically, it goes through the building department or code enforcement department. The document tells the city and you that the home is safe and suitable for occupancy. Without it, you would not know if the home was safe to live in, so you can consider it a necessity! It is against the law in most municipalities to live in a home that the city has not inspected yet.
What is the Process?
Homebuilders go through quite an extensive process to obtain the Certificate of Occupancy. It requires more than just one inspection for the city to okay the livability of a home. Throughout the building process, the city will come out and conduct inspections. They need to see the home during various stages to ensure that each of the city’s codes are adhered to. Things like electric, plumbing, building structure, and HVAC will be inspected, amongst many others. If the city finds something that does not meet code, the building process must stop. The builder must then fix the problem and wait for the city to come back out and inspect the home again. It is not until the inspector gives the green light to move ahead that building can continue.
The final step in the building process is a final inspection. This is when the city comes out and decides if the home meets the necessary standards. At this point, the inspector will either approve the home for occupancy or deny it. If they approve the home, they issue the Certificate of Occupancy and you can move ahead with your closing. If they do not approve the home, the process has to occur all over again. The builder must fix the problems and wait for the final inspection again before you close on the home.
Securing a Mortgage Without the CO
Your mortgage depends on many conditions to come together in order for it to close. Not only do you have to prove your financial worth, the property must pass certain requirements. Among those requirements is the need for the CO. Without it, most banks will not close on your loan.
There are some cases where a lender might allow you to close on your loan if you have a Temporary Certificate of Occupancy. This document expires after a certain amount of time and grants you temporary access to the home based on the minor adjustments the city deemed necessary. However, any lender that accepts a temporary CO will have many conditions attached to the approval. These conditions may include:
- An inspection conducted by the lender to ensure the home is safe to live in (you must pay for the inspection)
- Set a finite date for the permanent CO to be available based on the expiration date of the temporary CO
- You may have to set up an escrow account with money to cover the necessary changes in order to protect the lender
The lender is at great risk for default if they close on a loan on a home that does not have a Certificate of Occupancy. There are many issues the lender can face including:
- Decrease in the home’s value, leaving you upside down on your home since the home never reached its designated value due to not passing inspection
- Risk you walking away from the home if the builder never completes the necessary repairs
- If it is an investment home, the landlord cannot rent out the home until the CO is complete as it is against the law to rent to others without a CO
Ultimately, the lender is at risk for default without a CO, which is why it is hard to find a lender willing to issue a loan with even a temporary Certificate of Occupancy.
Existing Homes Have a Certificate of Occupancy
It is important to mention that most existing homes already have a Certificate of Occupancy on file with the city. If you were to purchase an existing home, the closing agent could check with the city to make sure the CO is on file. The only time you might find that you need a new CO for an existing home is if there were permits on file that signified major work. For example, if the current owners added onto the home or changed the structure in any way, a new CO may be necessary. This is because the structural soundness of the home could have been affected by the renovations. All permits require a final inspection, so if the owners went about it the right way, there should not be any issues.
The Certificate of Occupancy is just another step in the home building and mortgage process that serves to protect you. Without the CO, the home is not considered safe. Would you really want to purchase a home not considered safe for you and your family? While it might seem like just another delay in the process, it is meant to help you get through the home purchase process as successfully as possible. Knowing that the builder used safe materials and safe processes to get you into the home you wish to purchase can give you peace of mind.
The CO can also save you money down the road. If you were to move into a home that was not livable, it would cost you a significant amount of money to repair. Since the repairs are not optional, as your home would not be safe, it would be an extra expense on your already expensive home purchase.