Minimum Property Standards for FHA Loans

Minimum Property Standards for FHA Loans

Introduction

I am often asked what condition the property needs to be in so that it will pass an FHA appraisal. The answer is not a simple one because it depends on two separate processes, objective minimum standards and subjective interpretation. For example, below I will give a specific list of numerous acceptable and unacceptable deficiencies that can appear in the property. Approved FHA appraisers are instructed by HUD to report all property deficiencies that are readily observable and may fall under one of these lists. But of course the lists below are not exhaustive and so the appraiser must use prudent judgment in determining what could be interpreted as a deficiency and represents a potential marketing or safety issue.

Additionally, making things even more complex is that HUD also charges FHA approved lenders with responsibility to exercise professional judgment and prudent underwriting practice in assessing when a condition within the property may create an issue of marketability or safety. Therefore, even if the appraisal comes back in “as is” condition and not “subject to repairs”, the lender’s underwriter has the right to request that certain deficiencies be corrected prior to closing. Because there is a considerable amount of subjectivity, don’t be surprised to find some properties may be declined for FHA financing by one lender and approved by another.

The lists below are compiled from HUD MORTGAGEE LETTER 2005- ML-48, but again I would like to caution that as with practically every facet of this industry, guidelines are in constant flux and subject to modification at any time.

CONDITIONS NOT REQURING REPAIR

  • 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 counter tops
  • 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

CONDITIONS REQUIRING REPAIR

Here are some examples of property conditions that may be interpreted as a risk to the health and safety of the potential new home owners and for which FHA WILL require repair prior to closing:

  • Inadequate access/egress from bedrooms to exterior of home
  • Leaking or worn out roofs (if 3 or more layers of shingles on leaking or worn out roof, all existing shingles must be removed before re-roofing)
  • Evidence of structural problems (such as foundation damage caused by excessive settlement)
  • Defective paint surfaces in homes constructed pre-1978
  • Defective exterior paint surfaces in home constructed post-1978 where the finish is otherwise unprotected.

CONDITIONS NOT REQUIRING AUTOMATIC INSPECTION

  • Wood Destroying Insects/Organisms: inspection required only if evidence of active infestation, mandated by the state or local jurisdiction, if customary to area, or at lender’s discretion
  • Well (individual water system): test or inspection required if mandated by state or local jurisdiction; if there is knowledge that well water may be contaminated; when the water supply relies upon a water purification system due to presence of contaminants; or when there is evidence of:
  1. Corrosion of pipes (plumbing)
  2. Areas of intensive agriculture within ¼ mile
  3. Coal mining or gas drilling operations within ¼ mile
  4. Dump, junkyard, landfill, factory, gas station, or dry cleaning operation within ¼ mile
  5. Unusually objectionable taste, smell or appearance of well water
  • Septic: test or inspection required only if evidence of system failure, if mandated by state or local jurisdiction, if customary to the area, or at lender’s discretion
  • Flat and/or unobservable roof

CONDITIONS THAT WILL REQUIRE AUTOMATIC INSPECTION

  • Standing water against the foundation and/or excessively damp basements
  • Hazardous materials on the site or within the improvements
  • Faulty or defective mechanical systems (electrical, plumbing, or heating)
  • Evidence of possible structural failure (e.g., settlement or bulging foundation wall)

MISCELANEOUS CONDITIONS ON UTILITIES AND APPLIANCES

(HUD Reference Guide Chapter 1, Appraisal & Property Requirements Page 1-26 and 4905.1 REV-1)

UTILITIES and OTHER MECHANICAL

  • The property must have electricity in living units and may have either circuit breakers or fuses.
  • Appraisers will normally examine the electrical box to ensure that there are no frayed or exposed wires.
  • Existing 60-amp service is acceptable if it appears that this is adequate amperage for the appliances present in the property, or those considered "standard" if the present appliances appear to be less than found in the "standard" home.
  • Knob and tube wiring is acceptable if found to be in good condition and a minimum of 60-amps.
  • ALL habitable rooms must have a heat source, in the sense that each room must receive sufficient heat. (Exceptions: Homes located in the Caribbean, Hawaii and the Florida counties of Lee, Charlotte, Glades, Hendry, Palm Beach, Collier, Broward, Monroe and Miami-Dade.)
  • If the home has a wood burning stove or solar system, it must also have a conventional heating system that can maintain at least 50 degrees Fahrenheit in all living areas and those containing plumbing systems.
  • An air-conditioner (AC) is not required.
  • Propane fired furnaces located in a crawl space area is not acceptable.
  • Non-conventional heating systems, such as space heaters will not be acceptable as a primary source of heat by most lenders.
  • There must be a continuing supply of safe and potable water and a source of hot water.
  • There must be sanitary facilities and a safe method of sewage disposal
  • There must be a functioning water heater.

Appraisers are responsible for checking on the adequacy of these electrical, plumbing and or heating systems at the time of appraisal and will request professional certifications if he/she cannot determine if one or all of these systems are working properly. The certification will have to be done by a home inspector, an inspector from the local building department, an FHA compliance inspector, a professional in the specific field (e.g. electrician, plumber) or any individual whom the lender’s underwriter deems to be acceptably qualified. Logically, it is also a good practice to make sure the UTILITIES are ON when you do the initial inspection and when the appraiser goes to do the appraisal.

APPLIANCES

Does the home need appliances to qualify for an FHA loan? This is a question that constantly comes up, especially in foreclosed homes which may not have been inhabited for some time and/or vandalized.

The official FHA policy is that the property must have a space that provides suitable living, sleeping, cooking and dining accommodations. Some lenders interpret this to mean that the property must have a refrigerator, stove and dishwasher. That is not the case. A property does not need to have any of these appliances, but must have a space in which to conduct cooking related activities.

Again, remember that the lender and appraiser have ultimate responsibility for interpreting what meets typical market conditions and what is a safety issue. More often than not, in an increasingly litigious society, both the lender and appraiser will exercise caution and rule on the conservative side, so do not be surprised to have to dish out some money or have to negotiate with the seller for repairs that will have to be completed prior to closing. Your realtor will be a good source of guidance on issues that will be red flags upon your initial walk-through. When in question, approach the lender also.

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