The FHA Certification Checklist: Is your home even finance-able?
The government has published some pretty thick literature about the FHA Certification Requirements and the conditions homes must meet in order to qualify for financing with an FHA loan. Similar rules also apply to transactions involving USDA loans.
We're going to include a birds-eye view here, with most of the requirements relating directly to the condition of the home. (There are many other requirements involving zoning, surveys, encroachments and deed restrictions, and we've included links to the full government websites to help you learn the full picture.)
A lot of this was taken directly from the FHA Handbook Website.
To clarify: HUD requires an appraisal (with a built-in health-and-safety inspection). They do not require a regular home inspection -- but they strongly encourage it. This is a source of common confusion among buyers and sellers alike.
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 within 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. (THERE CANNOT BE ANY PEELING PAINT ANYWHERE, INSIDE OR OUTSIDE THE HOME, REGARDLESS OF THE YEAR THE HOME WAS BUILT. NO PEELING PAINT!!)
- All steps and stairways must have a handrail for safety. This is a commonly cited discrepancy during FHA appraisals. (HANDRAILS CANNOT BE EVEN SLIGHTLY WOBBLY and must be STURDY)
- 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.
More: For a complete checklist of these and other appraisal requirements, refer to HUD Handbook 4150.2. You'll find it on the HUD.gov website, and you can also DOWNLOAD IT HERE: http://www.fhahandbook.com/hud.php
APPRAISER'S GUIDE: FHA Handbook: http://www.fhahandbook.com/docs/41502ch3.pdf
Some more major repairs that FHA will almost always require fixing
- Non functioning HVAC
- Leaking Roof
- Peeling Paint in Pre 1978 Houses (Lead issue)
- Non-Functional kitchen (Usually missing/damaged Stove) ALL APPLIANCES PERMANENTLY INSTALLED MUST BE IN WORKING ORDER. THE APPRAISER WILL TEST EVERY APPLIANCE.
- Bad Drainage (Water in basement, standing water around foundation, bad grading of yard, inadequate drainage from gutters…)
- Damaged or missing floor coverings - no bare floors, no visible subfloor is allowed. (Carpet, Vinyl, Tiles, all must be complete and affixed properly to the floor.)
- Active pest infestations
- Bedrooms with insufficient egress
- Evident structural problems
- Dilapidated out-buildings (Think the rotted out shed that is about to fall over)
- Empty swimming pools
Some minor repairs that might get cited
- Missing/damaged handrails
- Cracked glass in a window (Not a broken or boarded up window)
- Damaged or soiled floors (Not to extensive and not a safety/trip hazard)
- Damaged walls, like small random holes
- Ripped screens
- Peeling paint in post 1978 built houses
- Minor plumbing issues (Think leaky faucets, busted pipes will be an issue)
- Evidence of previous (non active) pest infestation
- Rotted/damaged counters and cabinets
- ANYTHING else they decide to put on there…
You might have an issue. This one could be borderline for being cited as an issue for a conventional loan as well.
Bullet point #10 above is the biggest issue with FHA repairs. It is that you just do not know what other things they might say are an issue and will need to be fixed. You can try to talk with them and try to get them to change the requirements but if they are not open minded they do not have to listen to you and there is no particular recourse for you. The choice generally will come down to do all the repairs listed or lose the sale.
If you feel the best way to sell your property is to a retail buyer then you should be willing to work with FHA buyers. This group is a very sizable portion of buyers and if your goal is to maximize your sale price having the largest pool of potential buyers possible will be needed for that.
If you want to sell the place fast and with as few hassles as possible that is not going to be the experience with an FHA buyer. While selling to any retail buyer that needs financing can be slow and lots of issues come up someone getting a conventional loan will likely close a bit faster and with far less issues.
Another important point to consider is that when selling to an FHA buyer the repairs will be required and you must do them or the sale will fall through. When selling to a conventional buyer they can request repairs but you do not have to do them, it is part of the negotiations. If you want to sell your home fast and "AS-IS," that is unlikely to happen with an FHA buyer and can be an issue for many conventional buyers as well, but it is possible. Of course when selling to an investor that is the normal way.
In summary working with FHA borrowers is necessary to maximize exposure of your property but that exposure comes with a price.
Do you want the opposite of the FHA experience? Do you need to sell your North Carolina house fast? If you would like to sell your home fast and hassle free schedule a consultation with us today.
BUT WAIT....BACKUP....What is an FHA loan? WHAT DOES THIS ALL MEAN?
FHA mortgage loans are insured by the federal government. The program is managed by the Federal Housing Administration and its parent organization, the Department of Housing and Urban Development (HUD). The Federal Housing Administration insures lenders against losses that may result from borrower default. This government-provided insurance is the primary difference between FHA and conventional or “regular” home loans (learn more).
Down payments are another FHA distinction. Borrowers who use this program can put as little as 3.5% down when buying a house.
These days, many of the banks and lenders that provide home loans in general offer FHA products as well. The program has become much more popular since the housing market crashed, though its popularity has waned a bit over the last two years. These loans are particularly popular among first-time buyers, due to the relatively small down payment mentioned above.
Here’s one thing borrowers should know about FHA loan requirements in 2015: Contrary to popular belief, they are not necessarily “easy” to obtain. That may have been true to some extent in the past. But it’s not anymore. Let’s discuss the reasons why…
FHA Recent Program Modifications: Not an ‘Easy’ Loan Anymore
There is a longstanding notion that FHA loans are easier to obtain, when compared to a “regular” conventional loan. This is due to the government insurance mentioned above.
There is some truth to this notion. Historically, borrowers who could not qualify for conventional financing have been able to use the FHA program as a last resort. The government backing makes lenders a bit more forgiving, when it comes to borrower qualifications and credentials.
But the qualification “gap” has narrowed over the last two or three years. The reason for this is that the Federal Housing Administration’s capital reserve fund (the money they are required to have on hand) took a huge hit during the housing crisis and subsequent recession. In fact, the FHA went into the red for a while, having no reserve funds at all.
In 2013, the usually self-sufficient agency required a taxpayer bailout of $1.7 billion to cover losses resulting from shaky loans made during the housing collapse. That was the first time in the agency’s 79-year history that it required taxpayer funding to stay afloat.
In the wake of those troubles, the Department of Housing and Urban Development made a series of FHA program changes designed to (A) bolster revenues and (B) reduce future losses. Among the changes were new credit-score rules for borrowers, higher insurance premiums, and reduced limits on maximum loan size. In short, the agency is now requiring higher standards for borrowers, and charging more for FHA loans. These rules will apply to borrowers in 2015 as well (see the guidelines section below).
2015 Guidelines and Requirements at a Glance
FHA guidelines and requirements for 2015 will be very similar to what they are now. No major changes have taken place over the last few months, and none have been announced for the months ahead. That doesn’t mean HUD won’t make additional program changes sometime during 2015. They certainly could. It just means we don’t anticipate anything new for the foreseeable future.
-This program is open to all borrowers who meet the minimum eligibility requirements below. It is not limited to first-time buyers, contrary to popular belief.
-All FHA borrowers are required to make a down payment of at least 3.5% of the sale price or the appraised value (whichever is less).
-To qualify for the 3.5% down-payment option mentioned above, borrowers must have a credit score of 580 or higher.
-Borrowers with a credit score between 500 and 579 must put at least 10% down, if they can get approved at all.
-There are debt requirements as well, but these are a bit more lax when compared to the credit scores above. Generally speaking, a borrower’s total monthly debt load should account for no more than 43% of his or her monthly income.
HUD allows borrowers to have higher debt-to-income ratios if the lender can identify and document “significant compensating factors.” Such factors might include a long history of timely mortgage payments, excellent credit, or significant cash reserves. For a complete list of compensating factors for “high-debt” borrowers, refer to HUD Handbook 4155.1, Chapter 4, Section F.
Borrowers with credit scores below 620, and total debt-to-income (DTI) ratios above 43%, may encounter additional scrutiny during the application and approval process. Borrowers in this bracket may have to undergo manual underwriting. The underwriter will be looking for compensating factors to make up for the low-score / high-debt situation.
Lenders can impose their own guidelines on top of those promulgated by HUD. This is known as an “overlay.” So it’s possible for a borrower to be turned down due to a low credit score (for instance), even though the score meets HUD’s minimum cutoff. There are essentially two sets of requirements — the lender’s, and the government’s.
Note: This is a brief overview of 2015 FHA standards and guidelines. For more information on this subject, refer to FHAhandbook.com or HUD.gov. Additionally, there are exceptions and allowances to many of the requirements mentioned above. Borrowers should not assume they are unqualified based on one or more of these guidelines. The only way to know for sure is to apply for the program.