The FHA’s minimum standards only apply to properties to be purchased using loans from the FHA and the main goal of these requirements is to guarantee the safety of the incoming occupants, while at the same time establishing the approximate market value of the property.
Before awarding a mortgage loan to a borrower, the FHA usually sends a HUD-approved and licensed appraiser who is familiar with the FHA’s minimum requirements to appraise the property. Just to clarify, an appraisal is a thorough inspection of a property or any other asset by a qualified expert to determine its market value.
The Main Objectives of the Minimum Property Standards
Traditionally, every lender requires the properties that serve as collateral for mortgages to meet some basic conditions mainly to protect itself in case the borrower defaults on their loan. This means that the lender does not want to issue loans backed by properties that would be problematic to sell in future. The lender also does not want to issue mortgages for dilapidated properties, which do not inspire the mortgagor to keep up with monthly payments during hard times because they would not mind losing the home.
However, the FHA minimum property requirements go a step further in that their main goal is to guarantee the health and safety of the property’s residents. This is why the FHA’s appraisal is usually referred to as a ‘double duty’ appraisal because the appraiser also has to establish the home’s market value in addition to inspecting it for the health and safety standards. Therefore, the main difference between a standard appraisal and the one conducted by the HUD is the depth of inspection with the HUD appraisal being more thorough.
How the FHA Appraisal Is Conducted
The FHA appraisal must be conducted by a home appraiser who is approved and licensed by the Department of Housing and Urban Development (HUD). According to the standard guidelines, the appraiser must perform each of the following activities.
1) He must conduct a visual inspection of the concerned property both on the outside and the inside.
2) He must take photographs of the home that depict the front, the rear and the sides, while also highlighting any improvements such as a patio or a pool. These photos will be part of the loan file.
3) He must take photos of nearby homes that were recently sold, which are being used as comparable sales.
4) He must submit a street map of the neighborhood highlighting the home’s location and the locations of all the properties selected as comparable sales.
5) For vacant properties on which construction activities have been proposed, he should take photos that highlight the lot’s grade.
What Are Some of The FHA’s Minimum Property Requirements?
Some of the critical areas that are inspected by the HUD appraiser are the lot grade, the roof, mechanical systems, the foundation, electricity and heating, and the ventilation systems. The main concern for a HUD appraiser is the health and safety of the prospective homeowner guided by the principle that the home must be safe for occupation and must be comfortable without posing any dangers to the occupants.
– The home must be structurally sound. This means that the property should not have any leakage, any excessive dampness, any decay, or any significant damage from termites among other defects. The property should be properly graded so that water does not seep into the foundation, but should simply flow away from the property.
– The bedrooms on the property should have exists leading to the outside in case of a fire or other emergencies. Windows also qualify if they can allow an adult to egress.
– The home should have a heating system that allows for comfortable and healthy living throughout the year, except for a few cities that have less severe winters.
– The electrical box and fittings in the house should not have any exposed or frayed wires as these endanger the safety of the occupants.
– The roof should be able to prevent moisture from getting into the house and must be projected to last for a minimum of two years. The roof must not have more than three roofing layers and should not require repairs if it has three roofing layers, otherwise, the seller must install a new roof.
– Another requirement is that the home must have a functioning shower, toilet and sink. This is largely to ensure that the previous owner did not damage the bathrooms upon vacating the premises, which happens frequently during foreclosures.
– The stairways and all the steps must have a handrail for the occupants’ safety. Furthermore, homes with lead-based paint should not have any paint damages as they are a health hazard.
– The home’s foundation must be in good condition that allows it to withstand any standard loads that are imposed on it.
– The property should be situated in a street that has an all-weather surface to ensure that emergency vehicles have easy access to the property regardless of the weather. The home should also allow easy and safe access for vehicles and pedestrians.
– The home should not be exposed to too many hazards and irritants such as noise from airports, traffic jams, contaminated soil, or location close to high-voltage transmission lines.
This is not an exhaustive list of all the FHA’s minimum requirements, but should be a sufficient guide for potential homebuyers who want to get a good understanding of these regulations.
For more information, you can access the HUD homeownership center here (insert link).
The FHA usually recommends that potential buyers have any property they are considering undergo a regular home appraisal. To be clear, this is not a mandatory condition, but it is strongly encouraged. Borrowers applying for FHA loans must sign a disclosure form stating that they understand the significance of getting a regular home inspection in addition to the FHA appraisal.
Repairing Properties That Do Not Meet the Minimum Requirements
Many potential homeowners believe that if the house you want to purchase does not meet all the health and safety requirements during the first inspection, you will not qualify for a FHA loan, but this is not accurate. Despite the number of hits the home got during the first inspection, you can still get the FHA loan if you correct the infractions and get the house up to code before the final inspection where the appraiser will be using the hit list from the first inspection.
The main defects that usually leads to a home being disqualified by the FHA upon the first inspection are defects that cannot be easily corrected such as bedrooms with no exists to the exterior. Other major defects might be old homes with leaking roofs, a lot of dampness, and floors that have holes.
Handling the Repair Costs
Once you have identified that a property needs repairs in order to meet the FHA’s minimum requirements you should inform the seller and ask him to make the repairs. Sometimes, the seller is unable to afford the repairs and might decide to increase the home’s selling price in order to make the repairs, but this rarely works. In most cases, the buyer will request the seller for a lower price so that he can handle the repair costs.
Moreover, if you are purchasing the home from a bank that foreclosed it, you may not be in luck as banks usually do not do repairs. In such a case, the deal cannot move forward and the bank will likely have to sell the home to a cash buyer, or a buyer backed by a lender with less stringent requirements who will approve the loan for the home in its current condition.
Losing a deal that you really like is quite frustrating, but your only option is to continue searching for a property that meets all the FHA requirements. This is a course of action that most FHA buyers have to endure and keep experiencing until they find a property that can be approved by the FHA. Homebuyers who have limited funds are likely to find that this process is much harder for them as the number of properties within their price range might be even fewer given that they must meet the FHA requirements.
Sometimes a buyer might be best served by applying for a non-FHA loan, or for the FHA (203) k loan, which has provisions that allow borrowers to buy homes that have significant problems. FHA loans typically makes it much easier for most borrowers to apply and qualify for mortgages, but they do not make it any easier to actually buy a property. Therefore, most FHA borrowers have a harder time finding properties to purchase that meet the stringent FHA guidelines, but in most cases, this is their only option.