For homebuyers who are struggling to come up with a minimum 5% down payment that conventional mortgages require, an FHA-backed home loan can sometimes be the best route to take. The criteria is also not as strict as conventional mortgage programs, which means stellar credit isn’t always mandatory to be accepted.
However, in addition to homeowners having to be eligible for an FHA mortgage, the home they plan to purchase must also meet specific standards in order to get approval. In fact, property requirements are a critical component of the FHA program. While it may be the seller’s responsibility to bring a home up to par, sometimes the buyer may be on the hook to make the necessary updates depending on how the buyer’s purchase offer is drafted up.
Having said that, the minimum property standards that are required by the U.S. Department of Housing and Urban Development (HUD) are mainly concerned with a home’s safety, security, and structural soundness. The HUD also specifies certain conditions that properties must meet in order to successfully fulfill these requirements.
A bank-approved appraiser will take a look at the property’s condition, then submit the appraisal report to the lender before an FHA loan is approved. Generally speaking, cosmetic issues, minor flaws, and normal wear and tear are not looked at as long as they don’t have an impact on the property’s level of safety, security or structural soundness. That includes things like cracked window glass, missing handrails, worn out flooring, or debris, for instance.
Here are the basic requirements that properties must meet in order for an FHA home loan to be approved.
- Septic systems must operate efficiently. If they don’t, issues that could affect their operation, such as topography and soil permeability, will be looked at and will need to be remedied.
- No hazards should be present, such as close proximity to hazardous waste sites, gas wells, flammable items, high-voltage power lines, or transmission towers. In addition, the soil surrounding the property cannot be contaminated.
- No nuisances should be present, including noise due to heavy vehicular traffic or airplanes.
- Access to the property must be safe and satisfactory for pedestrians, regular vehicles, and emergency vehicles under any weather conditions.
- The structure cannot be compromised as a result of excess moisture, sub par construction, leakage, termite damage, and sloping settlement.
- Electrical boxes cannot have any exposed or damaged wires.
- Electricity must be available to operate lighting and any installed systems.
- Roofs must be in decent condition deemed not to require replacement any earlier than two years. In addition, they cannot have any more than three layers, and must be able to adequately keep moisture out.
- Attics and crawlspaces cannot have any excess moisture and must have some type of adequate ventilation.
- Water heaters must meet local building codes.
- Any presence of asbestos warrants additional attention from an asbestos professional.
- A working toilet, sink, and shower must be present.
- Kitchen appliances, including a functional stove, must be present.
- No major plumbing issues and leaks should exist.
- HVAC systems must be in proper working order.
- No rotting of the exterior, including walls and window sills, can be present.
- Exterior doors must properly open and close.
- There must be a sufficient water supply, including hot water, drinkable water, and an acceptable method to dispose of sewage.
- No active pest infestation may be present.
- The home must have adequate grading on all sides to allow for proper drainage.
- Bedrooms must have minimize-sized windows.
- Swimming pools cannot be empty nor have an inoperable pump.
- Fencing cannot be leaning or broken.
This list is by no means exhaustive. A more detailed list is outlined in the HUD Handbook 4150.2, chapter 3, which can be accessed online.
What Happens if the Property Does Not Meet FHA Requirements?
If you’re planning to buy a home that falls short of the FHA’s stringent requirements, start by working with the seller. Ask them if they can make any of the necessary repairs. If not, consider negotiating a lower purchase price to cover the costs associated with having to make these repairs yourself. Some issues will definitely be deal breakers, but others might be able to be dealt with before closing.
If all else fails, you may be stuck looking for another home if the list of repairs is just too lengthy to make the home worth your time, effort, and money. Or else, trying to get approved for a different mortgage product may be necessary in order to avoid having to ensure the subject property meets all the FHA’s requirements.
Of course, the lender will have a separate set of criteria that you will have to meet in order to get approved for a home loan. There is also the option of applying for an FHA 203(k) loan, which allows buyers to purchase homes that have major problems.
The Bottom Line
While an FHA mortgage might be easier to get approved for, it can actually make it tougher to close on a home based on various issues that may come with the property. It’s important to be fully aware of what to expect when choosing an FHA loan, as it can restrict the properties that you might have on your short list.