A Federal Housing Administration (FHA) loan is a mortgage backed by the federal government. It is designed for low to moderate-income buyers, requiring a lower down payment and credit score than other conventional loans. But some buyers may be surprised to know that they can’t always purchase the home they want when using an FHA loan.
Don’t worry, it’s not as bad as it sounds. It’s actually in your best interests.
Because buyer requirements are lower with an FHA loan, the lender is taking on more risks. When a buyer doesn’t make their house payments, the lender will foreclose on the home and sell it to recoup as much of the financial loss as possible. In order to do that, the house needs to be in good condition, so the lender requires the property to meet certain safety and quality standards when it’s purchased.
When the home goes under contract, an FHA-approved appraiser will go to the home to make sure that the property standards are met. The appraiser has a detailed list of requirements, but, basically, this is what they are looking for:
- The property must be free of anything that may have adverse effects on the health and safety of the occupants.
- The structure of the home must be sound and the roof, foundation, and exterior should be undamaged.
- There should be no evidence of termites.
- Attic spaces and crawl spaces should be ventilated and unobstructed.
- The septic system, if there is one, must be functioning, and there must be sanitary waste disposal.
- Clean water must be available and the plumbing system working adequately.
- The electrical should be in good working order with no exposed or loose wiring.
- The heating system must adequately heat the home.
- No windows or doors should be cracked and flooring should be in good shape (no trip hazards or excessive wear that could be a safety issue).
- There should also be no signs of outlawed materials that have proven to be health hazards in the past, like lead-based paint.
- The property must be safely accessible by cars (from a public or private street) and pedestrians (steep stairs should have handrails).
- The soil should have no evidence of contamination and water should drain away from the home.
- There should be no underground storage tanks.
Well-maintained homes have a good chance of easily meeting all these requirements. If you’re hoping to pay a lower price by buying a fixer-upper and making repairs, an FHA loan may not be the best option, because the property may not meet all the requirements. But if you’re looking to purchase a home that won’t need a lot of repairs, you won’t have any issues with an FHA loan.
While the FHA requires the property to meet a lot of standards, it’s really for the buyer’s benefit too. It means they won’t have to complete as many repairs later on.
Determining the Home’s Value
An FHA appraisal is a lot like appraisals for conventional loans – it too is meant to determine the home’s value. This lets the lender know if they are lending more money than the home is actually worth. This would guarantee a significant monetary loss for them if they were forced to foreclose on the home and sell it in a few years.
What if a Standard Isn’t Met?
If the FHA appraiser discovers a property doesn’t meet health and safety standards, it doesn’t always mean the deal is dead. The seller has the option to make repairs to meet FHA requirements. The appraisals are good for 120 days, which is plenty of time for most repairs. If the property is too far in disrepair, like a cracked foundation or extensive mold damage, the FHA may deem it ineligible, which would force the lender to reject the property.
What if the Home Doesn’t Appraise for the Contract Price?
If the home doesn’t appraise, three things can happen:
- The seller agrees to lower the purchase price to the appraised value.
- The buyer terminates the offer.
- The buyer brings the difference in price in cash at closing. This isn’t an ideal situation, especially when most borrowers of FHA loans are working within a tight budget, but it will secure the property.
Does an FHA Appraisal Replace a Home Inspection?
No. While an FHA appraisal does take into consideration the condition of the home and which areas may need further repair, a home inspection is different than an appraisal. The appraisal is for the lender and provides a basic overview of the property. The home inspection is a deep dive for the buyers to have a thorough understanding of the condition of the home.
Who Pays for the FHA Appraisal?
The buyer is required to pay for the appraisal. It’s included in the closing costs. This is same for conventional loans, as well.
Have more questions about FHA loans? We are happy to put you in touch with an FHA-approved lender, who can give you more insight into the requirements and mortgage process. Email or call us when you’re ready.
What are the Property Requirements for FHA Loans?
