Home buyers who are pre-approved for FHA financing need to be aware of FHA's Guidelines for property condition. All buyers who utilize FHA financing to purchase their home will have a licensed FHA appraiser perform an appraisal.
The appraisal is typically ordered by the lender once the home inspection process is complete and the option period has expired. In addition to determining an opinion of market value, an FHA appraiser must also note certain deficiencies that may exist with the property condition.
Prior to 2006, FHA was considered by many to be overly strict with regards to property condition. In fact, many home sellers and/or their real estate agents would refuse to accept an offer from a buyer using FHA financing because appraisers would often require a significant amount of repairs.
Often times, the homes were in good structural condition and did not pose a health or safety issue to the occupants.
Back then, appraisers could require items such as damaged countertops, cracked window glass and some other cosmetic deficiencies to be repaired prior to closing, even on homes that may have been sold at a reduced price to offset the less than perfect condition.
In addition to scaring off some home sellers, these requirements would often discourage buyers looking for homes priced below market for cosmetic reasons from using FHA financing.
But on December 19, 2005, HUD published mortgagee letter 2005-ML-48, which eased many of these restrictions. Homes that are structurally deficient or that may pose a health or safety risk to the occupants will still have to be repaired prior to closing. But for the most part, FHA appraisers will no longer require minor property conditions to be repaired prior to closing.
EXAMPLES OF MINOR PROPERTY CONDITIONS NO LONGER REQUIRED TO BE REPAIRED BY FHA INCLUDE:
- Missing handrails on stairs. Prior to this change, any staircase with more than three steps required handrails to be installed. Of course, it's still a good idea to have this done, but is no longer required by FHA.
- Damaged exterior doors that are otherwise operable. Generally speaking, if a door will close properly and does not have significant holes or damage, it will not have to be repaired.
- Cracked window glass.
- Defective and/or peeling paint on homes that were built after 1978. Lead paint was banned by the Consumer Product Safety Commission on September 2, 1977.
- Minor plumbing leaks. Appraisers can still require major leaks to be repaired. The definition of "minor" is subjective, so the final call is up to the individual appraiser.
- Defective floor finishing or excessively soiled carpet.
- Evidence of previous termite infestation and damage in which no evidence of unrepaired structural damage exists. If termites are active and damage is present, an appraiser will typically require this problem to be corrected prior to closing.
- Rotten or worn out countertops.
- Damaged plaster, sheetrock or other wall or ceiling materials in homes constructed after 1978.
- Poor workmanship. Again, this is subjective and doesn't mean that ALL poor workmanship will be excused. Poor workmanship that results in a structural, health or safety issue will likely still require repair. It's ultimately up to the appraiser and the underwriter.
- Trip hazards, such as heaving sidewalks and carpet that was poorly installed.
- Debris and/or trash present in the crawlspace of a home.
- Lack of an all-weather driveway surface.
IMPORTANT NOTE!! - Some lenders have OVERLAY GUIDELINES, which are arbitrary guidelines over and above FHA's minimum requirements. Home buyers purchasing homes with any of these conditions should consult with their lender and/or loan officer to see if they will require any of these items to be repaired or replaced before closing.
EXAMPLES OF PROPERTY CONDITIONS THAT STILL REQUIRE AUTOMATIC REPAIR PER FHA INCLUDE, BUT MAY NOT BE LIMITED TO:
- Leaking or worn out roofs. If more than three layers of shingles exist on a bad roof, all must be removed before roof can be replaced.
- Inadequate access to exits from bedrooms.
- Evidence of structural and/or foundation problems. (NOTE-Contrary to popular belief, Conventional loans such as Fannie Mae and Freddie Mac may also require foundation and structural problems to be repaired prior to closing.)
- Defective interior or exterior paint surfaces in homes built prior to 1978.
- Defective exterior paint surfaces on homes built after 1978 where the finish is otherwise unprotected.
PROPERTY INSPECTIONS (SEPARATE FROM A HOME INSPECTION, WHICH I RECOMMEND FOR ALL BUYERS)
FHA also no longer mandates automatic inspections for the following:
- Termites and/or wood destroying insects unless active infestation is observed by the appraiser.
- Well and septic test.
- Inspection for a roof that is flat or otherwise unobservable.
IMPORTANT NOTE!!-Individual lenders may require these inspections to be conducted even though FHA does not specifically require them. Again, these requirements are called OVERLAY GUIDELINES and can be imposed by lenders that choose to require a higher standard than FHA's basic requirements. These inspections may also be required if mandated by state or local laws or if they are customary for the area.
FHA will continue to require inspections when the following conditions exist:
- Standing water against the foundation and/or excessively damp basements. Such conditions can easily lead to foundation and other structural problems and also can be very conducive to wood destroying insect infestation.
- Hazardous materials on site or located within the improvements.
- Faulty or defective mechanical systems, including electrical, plumbing and HVAC.
- Evidence of structural problems or structural failure, including foundation cracks.
HOME BUYERS that haven't already signed a buyer's representation agreement with another agent: If you are looking to purchase a "fixer-upper" home, contact me to discuss other financing options that may be available. There are still loans that allow repairs, both minor and major, to be escrowed. I can evaluate your options and put you in touch with lenders that can help. There are also some great programs available on foreclosures that allow repairs to be rolled into the loan. I have ten years experience as a lender prior to becoming a full time Realtor(R), so put my experience to work FOR YOU!
HOME SELLERS that haven't already signed a representation agreement with another agent and are concerned about whether or not their home meets FHA requirements should call or email me with questions. DON'T AUTOMATICALLY ASSUME THAT FHA WILL NOT ALLOW YOUR HOME TO BE FINANCED without consulting with me first. The pool of FHA buyers has increased significantly over the last few years due to many reasons, such as the increase in down payment, credit score and general credit guidelines for Conventional loans, as well as the fall of subprime and Alt A loans.
You may be missing out on a large pool of buyers if you refuse to accept an offer from an FHA approved buyer. Call or email me today and we'll evaluate your individual situation. I have ten years experience as a lender prior to becoming a full time Realtor (R), so use my experience to HELP YOU sell your home!