A Look Into the FHA's Property Standards
When Mrs Money Smith and I decided to purchase our first property, we knew that we would need to take advantage of an FHA (Federal Housing Administration) loan. This type of loan was appropriate for us because of two main reasons:
Our combined incomes were over the threshold that particular Massachusetts specific loan options allowed.
FHA loans allow as low as a 3.5% down payment on the house! (as of right now, in 2018)
We were educated on the types of loans that we could take advantage of through the help of a mortgage loan officer (MLO for short). This is someone whose main job is to work with buyers to secure financing, through whatever means deemed appropriate. They gather lots of personal information about the buyer upfront and can quickly determine what the best options are as far as interest rates, and down payment expectations, and other particular nuances to the situation.
Once it was determined that the MLO could pre-qualify us for an FHA loan, we were ready to actually start viewing houses and making offers!
An important note about the home buying process is that you generally won’t be taken very seriously by sellers if you can’t provide proof of loan pre-approval. This is purely from an efficiency standpoint, as there are plenty of people who would like to buy a home, but aren’t ready or aren’t serious enough to actually follow through with a purchase at the time they are looking.
So you’ve found a home that you love and you want to make an offer. Before the actual transfer of the deed, and moving in, you need to get a series of inspections - one of which is by an appraiser designated by the FHA. This appraiser will go into the property and log their observations on a form called the Uniform Residential Appraisal Report. In this report, the appraiser will list out tons of information about the property, that those who collect and process these forms will look at to determine if the property fits their criteria.
At a base level, the minimum standards for a property, according to the FHA are:
Safety - The property needs to be safe to live in.
Security - This goes hand-in-hand with safety.
Soundness - This relates to the actual integrity of the property, namely physical appearances.
Because these are the three main categories that the FHA looks at, they won’t deny a property due to cosmetic issues, or deferred maintenance, as long as the issue isn’t affecting one of the three categories.
At the end of the day, the FHA is looking to protect home buyers. It’s in the best interest of both the lender, and the buyer to have stricter rules with a purchase. Simply put, the lender doesn’t want the buyer to find themselves with too many unexpected repairs and eventually defaulting on the mortgage. And likewise, the buyer (who is generally experiencing home ownership for the first time) gets some training wheels and another set of eyes to help point out flaws in the property.
What are some examples?
Below are some of the most common defects that will need to be remedied before a house can be sold under FHA guidelines.
Cracked or broken windows
Poorly done renovations
Heavily damaged flooring
Exposed wiring (even down at the electrical box)
Roof isn’t expected to last more than two years
Roof has more than three layers of roofing
Chipping paint in common areas
Lack of handrails on stairs
No heating sources in habitable rooms
Attic can’t show evidence of possible problems
What happens if my dream property has one of these problems?
First, don’t panic - it’s not the end of the world. You, as the buyer, would make these repair needs known to the seller, and depending on pricing, the seller may agree to remedy the issues. The seller doesn’t have to fix these items and can just rely on finding a non-FHA buyer, but depending on the market and the need to sell, might not be a good idea. The seller could also request a higher sale price, to compensate them for fixing the issues, but that would obviously mean more out of pocket expense for the buyer.
Oftentimes, if the seller is a bank, due to a foreclosure or other repossession, they may be unwilling to fix anything and the buyer will just have to find a new property, (I know- banks don’t always make the smartest decisions). Hopefully, if issues come up they will be reasonable to ask of repairs, but if something can’t be remedied then the buyer is honestly probably better off not trying to get the property anyway.
What’s the point in knowing all of this?
To bring this back to how FHA loan requirements can affect a sale, let’s flashback to our first property, South Pine Street. We made an offer on this property that was below asking, and after some negotiation we settled on a price. Once that happened, we had about a month to get all of our ducks in a row. That involved solidifying financing and getting various inspections completed. When the FHA inspector went through the house he found some chipping paint in the entryway, and presumably because the house was built before 1978, (the year that lead-based paint was banned in the United States), that needed to be fixed by the seller.
Luckily for us, the house was in decent enough condition that this was the only issue that was found by the inspector. The fix was easy enough and since it wasn’t too expensive to remedy, the seller didn’t ask for additional compensation for the job. We were able to quickly move past the issue and got a nice new paint job because of it. If there were bigger issues, like a roof that needed to be completely torn off and repaired, I don’t think the seller would have agreed and we would have been back to looking for another property.
Looking back, having the additional scrutiny of the FHA felt cumbersome and unnecessary at the time, but I am certainly glad that we had that now. Looking into the future, because we’ve decided to move across the country, we could potentially find ourselves taking advantage of another FHA loan, which is why I still try to stay up to date on their requirements. Follow this link for more resources and information about the FHA.
Have you experienced utilizing an FHA loan before? I’m more interested in learning about the experience from the seller’s side and what emotions and thoughts go through your head if and when you find out that something isn’t up to par for their needs. Comment below and let me know!