For others out there reading this, one way to avoid termite issue with FHA is to not condition the purchase with the WPA or termite. FHA loans do not require termite clearance and can close without termite inspections.If the buyer conducts the termite inspection during the course of the purchase, just like any other inspection, they can cancel their purchase if this repair issue is too much for them, just like if a roof repair was too much and the seller is unwilling to repair or credit the buyer for the issue.
A fully executed contract with WPA/Termite can be amended in escrow, if all parties agree, to waive termite inspection and repair, and this works if the inspection report has not already been given to the buyers lender.
Keep in mind that even if you waive inspection for termite, on FHA and VA, appraisers will often call out conditions of the property that will need to be corrected and will be called out for by the underwriter, these can range from peeling paint, to termite dry rot damage that is visually apparent to the appraiser and more.
This is why I tell my buyers and sellers that nothing is a done deal until the loan is funded, you can even get conditions at the very last minute no matter how hard we are all working thoughout the entire term of the escrow.
From my experience with 203k loans, the best advice is to use a lender that offers assistance via third party with 203k processing.
This shortens the closing time by weeks. Try http://www.cfs-mortgage.com/203k for more information.
The underwriter has the right to request any repairs they believe impact the value or safety of the collateral (home). If the appraiser called out specific issues with the home related to section 1 or 2, it is not uncommon for the underwriter to ask for these items be conditions to approval or funding.
If the purchase was AS IS, this is less likely but ultimately it is up to the underwriter.
Every Lender is different. It's rare, but possible the Buyer's Lender is requiring the work be completed prior to funding. That being said, what was agreed to in writing between you and the Buyer with regards to Section 2? Did the Buyer's agree to be responsible for any Section 2 repairs? If so, then the Buyer's will pay those costs out of escrow. The escrow officer will include these costs when they make their final request to the Buyer's to submit to Escrow the remaining funds needed to close the escrow. This will allow for you to have the Termite company make the needed repairs so that the termite completion report can be submited to the Buyer's Lender for their final approval prior to loan funding. Your Realtor should be able to assist you in this process. Good luck!
Last, section 2 items are usually very very very low cost. i.e. Moving dirt away from wood on the house or patio cover, turning a sprinkler away from the house etc. I have not seen very big laundry list items for section 2.
Can I ask what are the section 2 items?
I had one situation out of many where the underwriter requested all Section 1 and Section 2 items completed as a funding condition. This was even when the inspection was not a part of the contract and the purchase was AS IS.