Homebuyers who want to purchase their next homes using an FHA (Federal Housing Administration) loan sometimes get surprised if the property doesn't meet FHA requirements.
However, the FHA has several minimum standard requirements that the property should satisfy to protect lenders and loan lenders.
If homebuyers take a mortgage, they will use the property as collateral for the mortgage loan.
This means that if the homebuyer defaults on loan, the lender automatically forecloses the property and can sell to reclaim the amount of money owed.
Ensuring that the property meets the minimum standards protects lenders as it can be sold easily and also commands a high price.
Similarly, this requirement protects homebuyers as it eliminates possible costly home repairs and maintenance after purchase.
What are The Minimum FHA Property Standards?
The U.S Department of Housing and Urban Development requires that houses financed under FHA loans meet three basic standards. They include;
- Safety – homes should protect its occupants' health and safety
- Security – financed homes should be secure
- Soundness – homes shouldn't have visible physical deformities or apparent issues affecting their structural integrity.
That said, the department of HUD requires loan lenders to conduct an FHA inspection to ascertain the condition of the property and report their findings on an FHA appraisal form.
FHA appraisal is among the many requirements that homebuyers should meet before accessing a loan.
For single-family detached homes, FHA appraisers should use the Uniform Residential Appraisal Report, which requires the appraiser to describe various basic features of the house.
This includes the year built, number of stories, the number of rooms, square footage, and location. The appraiser should also note if the property requires any repairs or renovations.
Condominium units have slightly similar reports, only that questions are specific to the condominium.
For instance, appraisers should note how many owner-occupied units are there and more.
Note that FHA appraisal forms don't include minor or cosmetic defects that don't affect the property's security, safety, and soundness.
Therefore, minor issues, such as poor workmanship, minor plumbing leaks, lack of all-weather driveway, damaged plaster, defective floor finish, and worn-out countertops, can be ignored.
Even then, the FHA requires that major problems should be remedied before the sale closes.
What to Do If Your Home Doesn't Pass FHA Inspection
In some situations, the house doesn't meet FHA inspection guidelines.
Unfortunately, your mortgage loan can't be approved until these issues are resolved.
To secure funding, either the buyer, the seller, or the real estate agent should work on the necessary repairs on the property.
Below are three possible outcomes if the property doesn't pass FHA inspection;
1. The seller conduct repairs
Even if the property seller was selling the property as it is, some situations may require them to undertake some repairs, especially if the repairs are inexpensive.
For instance, sellers won't have an issue repairing a minor paint chipping that costs less than $50.
Therefore, you should share the appraisal report with the property seller for them to decide on what they can handle.
2. The real estate agents may repair
Real estate agents benefit from the 3% of the property purchase if the deal goes through. Therefore, they have everything to lose if the sale doesn't close.
For this reason, real estate agents may decide to spend a few thousand dollars to ensure that any property they are marketing meets FHA standards.
However, this is very risky, especially if the FHA loan isn't approved.
3. The buyer makes the repairs
Another possibility is that you, as the buyer, step in to work on necessary repairs.
However, this is not ideal, as the sale may fail even after spending a lot.
Therefore, while you should take caution, you should only work on key repairs to make the property eligible for an FHA loan.
If you are not a construction expert, be sure to contact home restoration experts.
Note that these situations are not possible in properties sold by the bank.
When buying real estate-owned homes or foreclosed properties, where the seller is the bank, banks often don't repair or grant access to potential buyers to repair.
This means that the FHA deal is dead, and you might have to consider other types of loans to buy the property.
The Bottom Line
FHA loans are an easy way for borrowers to qualify for a mortgage. However, this doesn't make it an easier way to buy a home.
If the house doesn't meet the minimum FHA standards, homebuyers have no option but to continue searching until they find a property that meets FHA standards.
This is very frustrating, especially to homebuyers with limited capital and few property options within their price range.
Therefore, if you intend to purchase a home using FHA loans, you should know what to expect as you shop to restrict your search into properties that meet FHA guidelines.