The Southern California community of the Hemet - San Jacinto Valley in the South West Riverside County section of the Inland Empire Region has been one of the hardest hit in the entire country for it's loss of owner occupied homes being seized by lenders and converted to bank owned, or REO, properties.

Once the banks finally take possession they must be cleaned up- and made ready for sale, often by the REO Listing Agent assigned to these assets of the bank.  I know, this is what I do.

Since the Hemet - San Jacinto CA market has traditionally been one of the lowest priced areas for home ownership, it should be no surprise that our inventory of bank owned homes for sale is still one of the lowest in all of California.

May of our REO homes are prepared and marketed towards the first time home buyer who generally does not have a lot of cash to buy a home so they are often attracted to a FHA Loan that only requires 3.5% down payment by the borrower.

Although there are requirements that the borrower must adhere to in order to qualify for a home loan there are also guidelines that the home the buyer wants to purchase must meet.  The requirements imposed by the FHA are spelled out in Section 1103 of FHA Guidelines. 

The FHA Guidelines used to be very strict; however in the last few years the FHA has reinvented itself and now the "FHA has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects or normal wear and tear."

In the old days, FHA rules prohibited financings where the property had cracked window panes, cracks in sidewalks, signs of "poor workmanship," defective floor finishes, leaky faucets, worn out or buckled carpeting, missing handrails on staircases, among others. Not only did sellers have to pay for repairs when their purchasers applied for FHA financing, but they had to submit to re-inspections -- all of which ate up time and sometimes killed the sales transaction altogether.

The following report covers the common problems that need attention when financing a property with an FHA loan in the Hemet - San Jacinto Valley. This list is NOT the official HUD policy and is not intended to cover everything. It is only my interpretation of HUD requirements which like everything the government gets involved with is always subject to frequent revision. Different lenders and appraisers will have their own interpretations. Its intended use is for real estate agents and buyers alike who need a basic understanding of HUD property requirements.


AS-IS vs. REPAIRS

FHA loans at one time would require that a whole laundry list of items be corrected prior to the new buyer closing escrow.  Today that has changed.

"FHA now permits "as-is" appraisals [on property] when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the safety of the occupants or the security and the soundness of the property. FHA no longer requires repairs for these types of minor cosmetic deficiencies."

Here are some examples of what conditions are no longer mandatory for FHA funding:

   - Missing Handrails
   - Cracked or damaged exit doors that are otherwise operable
   - Cracked window glass
   - Defective paint surfaces in homes constructed post 1978
   - Minor plumbing leaks (such as leaky faucets)
   - Defective floor finish/covering
   - Evidence of previous (non-active) Wood Destroying 
     Insect/Organism damage
   - Rotten or worn-out countertops - Damaged plaster,
     sheetrock or other wall and ceiling materials in homes
   - Poor workmanship
   - Trip hazards
   - Crawl space with debris
   - Lack of all-weather driveway surface


What the FHA is most concerned with today are true Health and Safety issues.  Here is a sample of what may Slow Down or Stop an escrow that is financed with FHA Money:

   - Inadequate access/egress from bedrooms to exterior of 
     homes
   - Leaking or worn out roofs
   - Evidence of structural problems
   - Defective paint surfaces in homes constructed pre-1978
   - Defective exterior paint surfaces in homes post
   - 1978 where the finish is otherwise unprotected


There will be issues that may require the FHA to have additional inspections performed if the appraisal reveals any of the following:

   - Standing water against the foundation and/or excessively
     damp basements
   - Hazardous materials on the site or within the improvements 
   - Faulty or defective mechanical systems (electrical, plumbing 
     or heating)
   - Evidence of possible structural failure (e.g. settlement or  
     bulging foundation wall)


APPLIANCES

There is a huge misconception about the FHA actually requires and what Underwriters want in the property.  Often times the underwriters own desires trump the FHA Guidelines - especially when it comes to kitchen appliances.

Section 1103 of the FHA Guidelines require that a home for sale must have ‘space' for cooking.  The guidelines do not specify how food is to be cooked or stored and there is no requirement for any specific type or even the presence of any appliances.  Local ordinances and building codes must be adhered to especially when it comes to having the right amperage available for kitchen appliances.

If appliances are in a non-working condition and the seller is not willing to deal with them, then we will generally remove them from bank owned homes before the appraiser ever shows up.  This then should meet the FHA Guidelines; however bear in mind that individual under writers may read the guidelines differently and require that working appliances are there and properly functioning.

HEAT & AIR

I kind of find this funny and anyone who has ever spent time in the Hemet - San Jacinto, Valley in Southern California because a heater that will heat the entire home is required but air conditioning is not.  Even if there is a non-operational AC unit, the FHA guidelines are not going to be enough to get the unit fixed or replaced.

POOL

If there is a pool then it must have a pool pump that will circulate the water in the pool.  There must also be enough water in the pool so that the pump can effectively circulate the water in the pool.

There are no test requirements imposed by FHA guidelines but the water in the pool cannot pose a health or safety risk - so that means no mosquitoes or algae.  I guess it's like a lot of other government rules and regulations - they continue to contradict themselves and when brought to the attention of the bureaucrats they just right more rules to follow.

MANDATORY INSPECTIONS

While local underwriters and lender imposed conditions may mandate that a home being purchased with an FHA guarantee be inspected for termites, septic and well conditions and even a roof inspection the FHA no longer requires any of these to fund a loan.

All the FHA wants to know in today's market is that the home must be habitable and safe for anyone living there.  Repairs are no longer as necessary as they once were.  Their appraisal requirements have been standardized so that only conditions that actually affect the structural soundness of the home and the safety or the occupants is now required.