An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.
As of 2017, these loans allow the borrower to borrow up to 96.5% of the value of the home; the 3.5% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time homebuyers.
FHA loans are offered to low-income individuals who have credit scores as low as 500. Individuals with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down. The Federal Housing Administration does not lend the borrower the money to take on a mortgage or to buy the house. Rather, the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan which the lending institution issues to him or her. In case of default, the lender’s financial risk is minimized since the FHA would step in to cover the payments.
Homebuyers intending to finance a home purchase with a Federal Housing Administration (FHA) loan may be surprised to learn that they won’t be allowed to purchase a particular property because it doesn’t meet FHA requirements. Why do these requirements exist, what are they and can they be remedied so that buyers can purchase the homes they want?
Why the FHA Establishes Minimum Property Standards
When a homebuyer gets a mortgage, the property serves as collateral. In other words, if the borrower stops making the mortgage payments, the lender will eventually foreclose on the borrower and take possession of the house. The lender will then sell the house to get back as much of the money it lent as possible.
Minimum Property Standards
An appraisal is an expert assessment of your property, during which the appraiser will look at comparable properties that have sold recently, in the same area as the one being purchased. He will also visit the “subject house” and evaluate it both inside and out. After this review process, the appraiser will write a report to detail his findings. The report will include an estimated value of the home, as well as any required repairs. The report will then be sent to the mortgage lender for review and further action.
According to the U.S. Department of Housing and Urban Development (HUD), the FHA requires that the properties financed with its loan products meet the following minimum standards:
- Safety: The home should protect the health and safety of the occupants.
- Security: The home should protect the security of the property (as explained in the previous section).
- Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.
Overview of FHA Appraisal Guidelines for 2017
According to the 2017 FHA appraisal guidelines, all properties being purchased with an FHA-insured mortgage loan must be appraised by a licensed, HUD-approved home appraiser.
At a minimum, the appraiser must complete the following steps:
- Visually inspect the subject property both inside and out.
- Take photos of the property to be included in the loan file. The photos must show the sides, front and rear of the home, as well as any value-adding improvements such as a pool or patio.
- Take a photo of each comparable sale transaction that is being used to support the appraisal.
- Obtain and provide a copy of a street map that shows the location of the property and each comparable sale, or “comp,” used during the valuation.
- Take photos that show the grade of the lot, if it’s a proposed construction.
These are the minimum steps that must be performed during an FHA home appraisal.
What Does the Appraiser Look for?
So, what does the FHA appraiser look for during this process? The primary areas of inspection are the roof, the foundation, lot grade, ventilation, mechanical systems, heating, electricity, and crawl spaces (when present).
Here are some of the key inspection areas required by HUD:
- HUD’s primary concern is the health and safety of the home buyer who will actually live in the house. Thus, most of their appraisal/inspection checkpoints have to do with health and safety aspects of the property. Above all, the home must be habitable and comfortable, without any potential hazards to the occupant.
- The lot should be graded in a way that prevents moisture from entering the basement and/or foundation. In other words, the lot should be sloped to allow water to drain away from the house — not toward it.
- All bedrooms should have egress to the exterior, for reasons of fire safety. A bedroom window will suffice, as long as it’s large enough to allow egress.
- Many homes built before 1978 still contain lead-based paint, which is a potential health hazard. In these homes, the appraiser will check for damaged paint (peeling, chipping, etc.). Such conditions must be corrected before the loan will go through.
- All steps and stairways must have a handrail for safety. This is a commonly cited discrepancy during FHA appraisals.
- The heating system must be sufficient to create “healthful and comfortable living conditions” inside the home.
- The roof should be in a good state of repair and must keep moisture from entering the home. It should “provide reasonable future utility, durability, and economy of maintenance.”
- The foundation should be in good repair and able to withstand “all normal loads imposed” on it.
According to HUD Handbook 4150.2, the home “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants.”
The bottom is that if something poses a threat to the health and safety of the occupant, or to the structure itself, it will probably be marked as “subject to repair.” This is the central theme that runs throughout the appraisal guidelines. The FHA says that examples of such problems include but are not limited to the following:
- 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 or covering (worn through the finish, badly soiled carpeting)
- Evidence of previous (non-active) wood-destroying insect/organism damage where there is no evidence of unrepaired structural damage
- Rotten or worn-out countertops
- Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post-1978
- Poor workmanship
- Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
- Crawl space with debris and trash
- Lack of an all-weather driveway surface
There are many areas where the FHA does require problems to be remedied in order for the sale to close. Here are some of the most common issues that homebuyers are likely to face.
Electrical and Heating
- The electrical box should not have any frayed or exposed wires.
- All habitable rooms must have a functioning heat source (except in a few select cities with mild winters).
Roofs and Attics
- The roofing must keep moisture out.
- The roofing must be expected to last for at least two more years.
- The appraiser must inspect the attic for evidence of possible roof problems.
- 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 water heater must meet local building codes and must convey with the property.
Hazards and Nuisances
A number of conditions fall under this category. They include but are not limited to the following:
- Contaminated soil
- Proximity to a hazardous waste site
- Oil and gas wells located on the property
- Heavy traffic
- Airport noise and hazards
- Other sources of excessive noise
- Proximity to something that could explode, such as a high-pressure petroleum line
- Proximity to high-voltage power lines
- Proximity to a radio or TV transmission tower
FHA loans make it easier for borrowers to qualify for a mortgage, but they don’t necessarily make it easier to buy a property. FHA borrowers who know what to expect when home shopping can restrict their search to properties that are likely to meet FHA guidelines, or at least avoid getting their hearts set on a fixer-upper property before having it appraised.
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.