Property considerations for FHA financing

I am writing this page to help you understand what the FHA does and does not require in regard to the condition of a property being purchased using an FHA loan.  The guidelines have changed in this area as the FHA has loosened up on its property requirements.  While these guidelines dictate what the Federal Housing Authority will accept to insure a loan, lenders will generally have “overlays” above and beyond these requirements so it is best to check in with a qualified FHA mortgage specialist with questions about a specific property.

There is a common mis-conception that an inspection by a government inspector is required to close an FHA loan.  This is not the case.  To close an FHA  loan, the appraiser must be FHA certified, and the appraiser must make a some extra warranties on their report.  We spent some time with Bob Singer with TracAppraisals here in San Francisco to show us what he looks for when completing an appraisal for an FHA loan.

Here, Bob Singer from TRACAppraisals.com explains the FHA visual appraisal inspection of siding in the first of this series.

Bob continues our guide to FHA visual appraisal inspections in the bathroom! A simple check of basic systems can help avoid delays when dealing with FHA.

FHA requires an inspection of the light and heat systems in every appraisal. 

Bob walks us through the kitchen inspection. What he is looking for may seem simple, but it is the simple things that can hold up a loan

Bob

Repair

Section 1103 – “FHA has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects or normal wear and tear.”

AS IS:

Section 1103 – “FHA now permits “as-is” appraisals [on property] when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the safety of the occupants or the security and the soundness of the property. FHA no longer requires repairs for these types of minor cosmetic deficiencies.”

Examples of conditions not necessitating repair include but are not limited to: 

• Minor plumbing leaks (leaky faucets)
• Defective floor finish/covering
• Worn-out countertops
• Lack of all-weather driveway surface

Examples of property conditions that the FHA will require repair include but are not limited to:

• Inadequate access/egress from bedrooms to exterior of home
• Leaking or worn-out roof
• evidence of structural problems
• Section I items on pest report
• Lack of a permenent heat source
• Health and safety issues – broken windows/lack of deck railing/missing or broken stairs
• Defective paint surfaces in homes constructed pre-1978
• Defective exterior paint surfaces in homes post-1978 where the finish is otherwise un-protected
• Illegal in-law units

“If the appraisal reports a potential property deficiency that may pose a threat to the safety of the occupants or the security and soundness of the property the lender will require an inspection of the condition to determine whether repairs are necessary to resolve the problem.”

Examples of conditions that will continue to require inspections include but are not limited to:

• 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 (eg. settlement or bulging foundation wall)

APPLIANCES:

FHA requires that if the property does have appliances they must be in working order.  If your clients are purchasing a home that contains appliances that do not work and the seller is not willing to fix, it would be best to ensure the removal of the non-working appliances prior to the appraisal.  This would be in compliance with FHA guidelines.  There must be a working stove or some kind in the kitchen.  If you have questions about appliances, it is best to check in with the lender.

AIR CONDITIONING (UTILITY):

FHA defines the Heating/Air Conditioning unit as a utility and NOT an appliance so different rules apply.  FHA only requires that the heating unit works and is able to heat the house.  They do not require that the A/C unit work.   

POOL:

FHA requires a home with a pool to have a working pool pump that is able to circulate the pool water.  They also require that the pool has enough water in it so that the pump can effectively circulate the pool water. 

FHA does not specifically test the water nor does it have a certain requirement as to the clarity to the water.  They do however open up a gray area by stating that the level and quality of the water in the pool must not pose a health or safety risk.  I.E. no mosquito infestations or algae!! 

INSPECTION REQUIREMENTS:

Section 1103 – “FHA no longer mandates automatic inspections for the following items and/or conditions in existing properties:”

   – Wood Destroying Insects/Organisms – TERMITES
   – Well (individual water system)
   – Septic
   – Flat and/or unobservable roof

The basic rule that FHA abides by is that the property must be habitable and safe for the occupants. The FHA no longer requires many repairs that they used to. They have standardized their appraisal requirements to include that only conditions that affect the structural soundness of a property and the safety of the occupants be repaired. In addition FHA does NOT require any inspections for termites, wells, septic systems and flat or unobservable roofs. They also do not generally require any special inspections other than an appraisal by an FHA licensed appraiser.

If your purchase contract calls for a pest inspection and there are section I items on the report, those will be required to be repaired before close of escrow.  Section II items are not required to be repaired unless they pose a threat to the health and safety of the occupants.

FHA Condos 

This is a very important subject for FHA loans in the San Francisco Bay Area.  FHA will lend on condos under two conditions.  1. The condo project has been formally approved by the FHA.  A google search for “fha condo” will lead you to a search engine to check to see if the project you are interested in is approved.  2. The project passes all requirements for a “spot loan” approval.  See below.  Feel free to ask any questions or run a project by me before putting in an offer.  The rules will be changing on October 1st.  Stay tuned.

FHA “SPOT LOAN” CONDOMINIUM CHECKLIST

• The legal documents of the HOA do not contain a right of first refusal or restrictive covenant.
• The unit is part of a condominium regime that provides for common and un-divided ownership of common areas by unit owners
• The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation.
• There are no special asseessments pending.
• No legal action is pending against the condominium association or its officers or directors.
• The common areas have been under the control of the association for at least one year.
• At least ninety (90%) of the total units in the project have been sold.
• At least fifty-one percent (51%) of the total units in the projects are owner-occupied.
• There are no adverse environmental factors affecting the project as a whole or individual units.
• No single entity owns more than ten percent (10%) of the total units in the project.
•  The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA.  Leasehold is attached, if applicable.
• The owners association has adequate common area insurance coverage.  General liability replacement coverage, etc. reflects the character, amenities and risks of the particular development.  Flood and other insurances carried, when applicable.
• The owners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance. 
• For projects consisting of over thirty (30) units, no more than ten percent (10%) of the total units are encumbered by FHA insured mortgages.
• For projects consisting of 30 units or less, no more than twenty percent (20%) of the total units are encumbered by FHA insured mortgages.
• General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the appraiser and / or the pictures.