Today's buzzword in buying a reasonably priced home is "foreclosure".  Foreclosed homes sell anywhere from 20%-60% lower than non-foreclosed homes, making their pricing much more attractive, but there are hurdles to overcome, especially when it comes to property condition.  Even though the home is foreclosed, it still must meet the requirements of new financing.  I've been working with foreclosed homes for more than 40% of my buyers lately, so I wanted to review a few of the problems we've encountered, and how to avoid them. 

To lend on a property, each type of mortgage will have its own requirements as to what inspections must be performed, and what degree of information must be provided by the appraiser.  In general, I have found that many appraisers are leaning more towards an FHA-level inspection for all properties, as underwriters have become more conservative.  As a result, what is discussed here will be consistent with FHA requirements.

Plumbing

If you had to review all the MLS listings for the past 12 months for trends in new information, one of the phrases you'll find increased in frequency the most is "copper missing".  As wave after wave of homes has been foreclosed, enterprising thieves have made an industry of removing thousands of dollars in copper plumbing from homes, and turning it into fifty or one hundred dollars in scrap.  Homes without functional plumbing systems due to vandalism will not qualify for normal financing at present. 

Also important in regards to plumbing is the functionality of every present item.  That is to say, if a particular fixture is in place, it should work.  Most good appraisers will test this by running sinks, flushing toilets, or more.  A concern at this time of year is winterization, as many homes are shut down over the winter to lower upkeep costs.  Most appraisers will require the home to be operable at time of inspection, with flowing water.

Heating

What's the one thing you couldn't live without in winter in New England?  A heating system!  Because of this, banks will require homes in cold areas to have a functional heating system that has been checked by an appraiser prior to closing.  Typically, an appraiser will adjust the home's thermostat so that it trips, and then verify that the system does turn on.  A non-working heating system is a quick way homes can be rejected for financing.

Flooring

The vast majority of the time, an appraiser's eyes won't stay focused on the floor of a home for more than a few seconds, as most homes floors are in perfectly acceptable condition.  Whether a floor is hardwood or carpet, tile or linoleum, a considerable proportion of homeowners have maintained their floors well.  Every once in a while, though, we do find a problem. 

When it comes to flooring, it need not be in perfect condition to pass, but there should be some degree of life left. 

For hardwood flooring, it is OK for the finish to be dull, even for some limited scuffing.  Missing floorboards or other serious problems can be sighted as deficient condition. 

For pergo and other tile-like flooring systems, all tiles should be in place and secure.  If any of the sub-floor is exposed, this can be ground to delay financing of the home.

For carpet, the carpet should be in reasonable condition with at least a little remaining spring.  Some minor staining is acceptable, but large areas of staining are problematic.  In addition, significant odors could present problems in underwriting.

Windows

Contrary to popular belief, replacement windows are not a requirement for closing, however, they will go a long way towards lowering heating expense.  In spite of the fact that underwriting cannot require windows be replaced, they will look for certain minimum standards. 

All windows should present the appearance of functionality, and should have intact glass.  In a house with otherwise OK windows, a single window with a cracked pane is unlikely to provoke additional requests from underwriting, but a single window with a broken pane and a hole almost certainly will.  In many cases, temporary measures, such as limited boarding (i.e. one or two windows) can be deemed acceptable.  If a house is fully boarded up, usually that will need to be undone before it can be inspected for mortgage purposes.

Walls

In most houses, little attention is paid to the walls, as they differ so little with what we expect of them as walls, that is, they are flat vertical surfaces with minimal interruption.  Problems can present themselves when we're looking at a home with deferred maintenance problems, such as we find in many foreclosures. 

Wall problems come in two basic varieties: damaged materials; and graffiti.  Wall materials can often become damaged by physical impacts; alternately, damage can be caused by intrusion of water into the home, weakening the integrity of the wall.  Regardless of the cause of the damage, only the most minor of problems can be ignored; any significant damage will normally cause underwriters to request repairs prior to closing. 

Graffiti can often be ignored, especially in small quantities.  If the artist had been more "creative", it can become necessary to paint before the home will pass inspection.  

Exterior

Contrary to popular belief, most home appraisers are not experts on roofing materials.  It is rare that an appraiser will get on a ladder to inspect the condition; more often appraisers will depend on evidence available from visual inspection from the ground, and from interior inspection to identify any water damage, the most common result of a roofing problem. 

The same goes for siding materials and paint.  The most common area where a home will fail FHA inspection is in regards to peeling paint, as lead concerns preclude closing FHA mortgages on homes that might cause lead poisoning.  In general, it is very easy to tell what constitutes peeling paint, as paint will often be coming off of the house in larger and larger sections.  If you as a home buyer look at a home and suspect the home might be considered to have peeling paint, it will almost certainly be cited for that deficiency. 

There are more potential problems a home could have than I can hope top cover in one article, but reading through this should give you a good idea of certain problems endemic to foreclosed homes.  As discussed, many of these problems will prevent a bank from closing conventional or regular FHA financing on those homes.  What kind of alternatives does this leave? 

203(k) financing

The 203(k) mortgage is a subsection of the FHA program allowing a buyer to finance based not only on the purchase price of the home, but also on the cost of rehabilitation or improvements to the home.  By working in conjunction with with a contractor, the bank will have assurance it wouldn't normally that the work will be performed satisfactorily, because both buyer and contractor must sign off to allow funds to be paid.  For more information about 203(k) mortgages, please see my other article. 

Thanks very much for reading!  Please leave comments if you have questions that aren't answered here, or with anything you'd like to add. 

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjuunct Professor with Roger Williams University and the University of New Haven.  He can be reached by cell phone at (401) 263-8655.  Photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.