FHA Guidelines For Property Condition | Dallas Home Buyer Information

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Real Estate Agent with Briggs Freeman Sotheby's International Realty 0596165

Dallas, TX 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 FHADowntown Dallas, TX 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. 

Downtown Dallas, TX 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! 

Posted by

John Jones, Realtor

Dallas City Center, Realtors

www.homesourcedallas.com

3100 Monticello Ave., Suite 200

Dallas, TX 75205

Dallas, TX Real Estate and surrounding areas of Richardson, Plano, Addison, Frisco, Carrollton, Farmers Branch, Garland, Allen, Irving, Rowlett, and Rockwall.

Dallas, TX neighborhoods and subdivisions of Lake Highlands, White Rock Lake, Lochwood, Eastwood, L Streets, M Streets, Hollywood Heights, Lakewood, Coronado and Gastonwood, Forest Hills, Lochwood, Eastwood, and Preston Hollow.

Copyright 2008-2013 by John Jones, All Rights Reserved.  You may reblog or republish with links back to this post. 

* THIS ARTICLE WAS ORIGINALLY PUBLISHED AT http://www.homesourcedallas.com  *

 

 

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Rainer
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David Selman
Selman Home Inspections, Inc. - Dallas, TX
Certified Master Home Inspector

Wow John! Great information. As a home inspector, the FHA guidelines could not be more difficult to deal with. It seems there are different rules for difference areas which makes this very confusing. If it is confusing for agents, just imaging how it must frustrate potential buyers. 

In addition, the items that are no longer preventing FHA loans in Dallas remian "deficiencies" that would be reported by any home inspector. I have done a lot of home inspections for people who I later learned where trying to get FHA loans. 

It is also interesting that it looks like the appraisal must come after the inspection. This seems crazy to me since many home sales today are killed by the appraisal. Why would the buyer go to the expense of the inspection before the appraisal if there is even a remote chance that the appraisal would kill the sale.

Just trying to understand so I can be knowledgeable when my home inspection clients ask these questions....

Mar 12, 2010 08:24 AM #1
Rainmaker
72,675
John Jones
Briggs Freeman Sotheby's International Realty - Dallas, TX

Hi David,

Thanks for stopping by.  Your question about doing inspections prior to appraisals is a very good one, so I'm going to give you an outline of the reasons...

First, there's no rule that says inspections have to come before appraisals, but there are several reasons why the inspection is typically performed prior to the appraisal. 

First and foremost, the third party financing addendum in the State of Texas contains a clause that states the buyer who is obtaining FHA financing is not obligated to complete the purchase of the home or forfeit their earnest money if the property does not appraise for the sales price. Therefore, the buyer is essentially protected for the term of the contract if the home does not appraise.  But if the inspector finds deficiencies that the buyer wants corrected, the buyer should typically try to negotiate these repairs with the seller prior to the expiration of the option period.  Otherwise, their leverage over the seller wanes considerably because they are now obligated to perform on the contract without an unrestricted right to terminate. 

I do agree there are many transactions that do not close because of appraised value, but I suspect that just as many, if not more, do not close because the buyer and seller cannot come to an agreement on repairs that were brought to the buyer's attention during the inspection.  I have no hard data to base this on other than years of experience, but am pretty sure most agents and lenders would agree with me on that. 

Also, I would guess that most Realtors have a lot more confidence in their ability to estimate the likely market value of homes than their ability to judge property condition.  Although we are not appraisers, we deal with market values every day.  But I couldn't tell you whether or not an electrical box is a fire hazard or whether an HVAC system is near the end of its life; that's your area of expertise.  In other words, we're more likely to encounter an unforseen issue with the inspection than with the appraisal, at least in my opinion.

Other reasons come to mind as well.  Unlike an inspection, an appraisal often requires many steps to be performed prior to the appraiser actually being able to perform the appraisal.  The lender must order a case number through FHA's website, which in some cases can take up to a few days.  Also, depending on the lender, the appraisal may have to be ordered through an AMC.  Then the appraiser has to receive the order, schedule a time to view the home, do their research on the comps and market before even going to the home.  Then they must prepare and deliver the report. 

Then, after all that (and this is a BIG one) an underwriter must review and approve the appraisal.  Many underwriters won't take the time to do this until they have a complete package of all other documents required to complete the loan, such as title work, employment and income documents from the buyer, tax certs, etc. 

That can all take as long as a few weeks depending on the lender's underwriting turnaround time and also how long it takes to receive these other documents.  Underwriters do not typically want to see home inspections (except in some extremely rare cases). 

So if buyers waited to order their inspection until after the appraisal process had completely run its full course, chances are their option period would be long gone.  Of course, option periods are negotiable and can be extended if both parties agree, but most sellers want some assurance that the buyer is obligated to perform as soon as they have had time to perform inspections and ask for repairs. Buyers are certainly allowed to ask for repairs after the option period has expired, but they no longer have an unrestricted right to terminate the contract if the seller declines to perform the repairs.  Not a good position to be in if you're the buyer.

I've experienced a few transactions where I wished the appraisal had been done before the inspection.  But thinking back, I can only imagine how many times a buyer would have wasted money on both an appraisal AND an inspection in transactions where the home would have easily appraised for the sales price but the buyer terminated within their option period either because they decided the home was not in satisfactory condition or because the buyer and seller could not come to an agreement on repairs.  IN either case, the inspection was always the catalyst.

If I can think of anything else, I'll post.  Thanks again for stopping by and feel free to add to this or ask any additional questions.

Mar 12, 2010 12:18 PM #2
Rainmaker
3,054,229
Tony and Suzanne Marriott, Associate Brokers
Haven Express @ Keller Williams Arizona Realty - Scottsdale, AZ
Serving Scottsdale, Phoenix and Maricopa County AZ

Contrary to popular opinion, Buyer Inspection Period is not an opportunity for a "free look".  The Buyer must act in "Good Faith" when making a decision to cancel during the inspection period.  Deciding they no longer like the floor plan doesn't count.....

Aug 18, 2010 12:43 AM #3
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