Homebuyers who are financing through a Federal Housing Administration (FHA) are often surprised to learn that the property they are hoping to buy does not meet FHA requirements. The most common question that loan officers hear is why can’t buyers can purchase the homes they want, as long as the appraised value is high enough?
All of this relates to protection for the mortgage lender. Since the property is furnished as collateral for the mortgage loan, if the borrower defaults on payments, the lender will eventually foreclose. Since it takes the house for sale to a third party, it needs to recover as much money as possible to replace the funds that it lent out.
Requiring that the property meet minimum standards protects the lender because it typically means that the property is easier to sell, and at a higher price in case of a foreclosure. The FHA requires that properties that it guarantees mortgages for have minimum standards for safety, security, and soundness.
Once the loan is applied for, an appraiser is sent out to observe and document the property's condition in a written form. The appraiser describes the basic features of the property, such as the year it was built, square footage, number of rooms and the like. The appraiser must "describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.)" and asks, "Are there any physical deficiencies or adverse conditions that affect the livability, soundness or structural integrity of the property?"
The FHA does not require the repair of cosmetic or minor defects, deferred maintenance and normal wear if they do not affect the safety, security or soundness. Examples of such problems include missing handrails, cracked or damaged exit doors that are operable, cracked window glass, minor plumbing leaks (such as leaky faucets), defective floor finish or rugs, and worn out countertops.
But there are many areas where the FHA does require problems to be remedied ahead of time in order for the sale to close. Here are some of the most common issues that will require correction before the closing:
This is the most common issue. For all homes built before January 1, 1978, the inspector will check all interior and exterior surfaces for chipping, peeling, and flaking paint. These surfaces must be scraped and repainted with a minimum of two coats of paint that closely matches the surrounding areas.
There must be proper drainage away from structure (1% slope for 5’ from building)
Minimum clearance of 6 inches from any wood to soil
Facia / soffits must be free of wood rot (treated, repaired & painted)
Gutters and down-spouts must be functional
Air conditioning compressor (if present) must be expected to last at least two more years
Electrical and Heating
The electrical box should not have any frayed or exposed wires.
All habitable rooms must have a functioning heat source
The roofing must keep moisture out.
The roofing must be expected to last for at least two more years.
The roof cannot have more than three layers of roofing.
If the inspection reveals the need for roof repairs and the roof already has three or more layers of roofing, the FHA requires a new roof.
The attic must be properly ventilated.
Basement or Crawl space
There must be proper access and ventilation, with a minimum of eighteen inches of clearance from floor joists to soil).
No evidence of major moisture build-up
Wood rot, mold and fungus must be removed, treated, and the areas repaired.
The water heater must meet local building codes, and must convey with the property.
Hazards and Nuisances
Proximity to a hazardous waste site
Oil and gas wells located on the property
Airport noise and other sources of excessive noise
Proximity to high-voltage power lines
Proximity to a radio or TV transmission tower
The property must provide safe and adequate access for pedestrians and vehicles, and the street must have an all-weather surface so that emergency vehicles can access the property under any weather conditions.
Any defective structural conditions and any other conditions that could lead to future structural damage must be remedied before the property can be sold. These include defective construction, excessive dampness, leakage, decay, termite damage and continuing settlement.
If an area of the home contains asbestos that appears to be damaged or deteriorating, the FHA requires further inspection by an asbestos professional.
The home must have a toilet, sink and shower.
So, what is a homebuyer to do if they want to buy a property that has one of these problems? Try to work something out with the seller, and ask the seller to make the repairs. If the seller cannot afford to make the repairs, the purchase price may be adjusted so that the seller will recoup the repair money back at closing. Another option is for the buyer to address the repairs before the closing. We see this primarily with peeling exterior paint, where the seller allows the buyer to come onto the property and scrape and paint areas flagged by the appraiser in order for the deal to go through. Obviously, there’s the risk that the buyer will lose out on the time and expense dedicated to address the issues if the purchase does not happen, but if the buyer wants the house this sometimes is the only option to keep the deal together.
If the seller is the bank (an REO sale), they may not be willing to make any repairs. In this case, the deal is likely dead, and the property will have to be sold to either a cash buyer or a non-FHA buyer whose lender will allow them to buy the property in its existing condition. The only remaining options would be to apply for a FHA 203(k) loan, which allows the purchase of a fixer-upper with significant issues, or to keep looking.
At Brooks & Crowley, we close dozens of loans every month, and have relationships with some of best lenders in the business. We can answer your questions, and put you in touch with the right lender for your needs. Call us anytime.