Many buyers today are considering the purchase of their primary residence using an FHA backed loan. Before any buyer hastily asks their agent to prepare an offer knowing that funding will be sourced through an FHA lender, there are important guidelines established by HUD (Housing and Urban Development) that must be complied with.

FHA loans are appraised by specially qualified and approved FHA appraisers. This factor is critically important because the lender’s underwriting guidelines often require that repairs or conditions noted by the appraiser be corrected BEFORE the close of escrow. 

This has a direct impact on properties being purchased which may be bank owned or offered subject to a short sale because banks (as the seller) include statements in their purchase contract addendums that prevent buyer access to the property for repairs prior to close of escrow. Furthermore, owners of properties subject to short sale are usually not in a position to negotiate for repair expenses … they simply do not have the cash resources to pay for repairs. Either of these situations leaves the buyer in a state of limbo, thus requiring further negotiations, which, if not granted, may result in a failed escrow. There are programs offered by some FHA lenders (but not all lenders) called FHA 203K loans, which take into consideration the need for repairs and even provide financing of those repairs.

Of course, it’s always best to understand the specific guidelines for minimum FHA requirements even before an offer is extended. If your agent is not fully versed on these guidelines, you might question the agent’s ability to be observant to property conditions that may affect value or desirability, one of the paramount duties (by law) that an agent has.

Published below is an article provided by Amy Parker, an approved and fully licensed FHA appraiser in response to an agent’s question.

January 16, 2009

Q. “I just showed a client a less than perfect home and they are an FHA buyer, what will the FHA guidelines require to be fixed?”

A. Over the last year many Realtors have asked me this important question.  In many cases, this is a specific question regarding a specific problem and the Realtor wants general answers. The answer is not always simple and I am more then happy to provide consultation on the phone.  But this month the question has been more prevalent so a BLOG discussion is definitely warranted.

Realtors need to understand that the FHA loan program is dependent on the HUD guidelines that are published for buyers, lenders, and appraisers.  A link to these guidelines is found FHA Repair Information from HUD.doc and there is also a direct link to the HUD website under the FHA Source at appraiseittoday.com website. Please note that these are guidelines and their interpretation is left to underwriters and lenders.  I share with you some fairly black and white items from the underwriting world today.

HUD is concerned with safety, security, and livability of the property being insured under the FHA loan program.  For the most part, they want the items to be fixed that make the home below average.  Homes that are considered below average for the neighborhood will have the appraisal written “subject to repair”. 

The appraiser will be asked to describe items that are non-cosmetic that make the home below average and in some cases they will have to provide a cost to cure the repair item.   In most cases the appraiser will be asked to reinspect the home prior to the close of escrow to confirm the repairs have been made.

What are some obvious things that could make a home below average?

• No heater
• No flooring
• No hot water
• Large holes in walls
• And much more

Other items that I’m frequently asked about:

• Old roofs that are not certifiable for 2 years will typically require repair or replacement.
• Section 1 pest work will need to be fixed and certified as completed. New wood will need to be painted with primer at a minimum and not left exposed.
• Homes built prior to 1978 with peeling paint on any structure on the site will have to have this issue repaired and repainted.
• Additions or modifications made without building permits (this is a case by case scenario requiring consultation)
• Pools need to be safe and operational.  That means the pool needs to be filled with water and have operational pool equipment.  Clean water is preferred.
• Appliances -  HUD prefers that homes have them.  Built in appliances that have been removed must always be replaced.
  

The following information is a partial list of items subject to inspection by the appraiser.

Interior                                                             Exterior

Ceiling discoloration                                              Cracks in foundation

Uneven flooring                                                   Attic shows roof water/staining

Floors spongy                                                      Attic shows holes in roof/sunlight

Flooring missing                                                   Loose/missing roof shakes/shingles

Holes in walls                                                      Decay or black matter noted in fascia

Water staining on walls                                         Siding missing or loose/signs of decay

Water damage to sheetrock in baths                       Standing water in crawl space

Stairs without hand rails                                        Crawl space with moisture

Appliances missing/not in place                               Evidence of pests/infestation

Smoke detectors missing/non-working                      Water stains in ceiling sheetrock

HVAC non-operational/regulator missing                   Roof pitch not in compliance

Exposed electrical wiring                                       Attic space not accessible

Electric switchplates/plugplates missing                   Distance between well & septic

Improper wiring in electrical box                              Window panes broken/missing

Electrical switches not operating                            Safety bars on windows w/o releases

Toilets inoperable                                                 All bedroom windows must open

Plumbing – all faucets work/no leaks                        Basement – adequate access

Hot water heater strapped to code                         Pools must be filled with water

Hot water heater venting                                      Pool equipment works

Hot water heater elevated 18”                               Peeling/chipped paint

Peeling interior paint (pre-1978)                             Fence leaning/down/safety hazard

                                                                        Water standing around home

Utilities                                                                            Termite activity

                                                                        Unpainted/exposed surfaces

Good water pressure                                            Windows boarded up

Electricity on and operational                                

Natural gas on and operational                               Off Site

Road                                                                 Sink holes, slush pits, flood zone

                                                                        Abandoned well

Access by all-weather road                                   Within electrical tower fall distance

Private road w/ maintenance agreement                   Proximity to airport

Shared driveway                                                  Proximity to landfill, industrial signs

For additional information, please review HUD website information located at:  http://www.hud.gov/offices/hsg/sfh/ref/hsgrcont.cfm

HUD/FHA Home Buyers Guide
www.hud.gov/offices/hsg/sfh/buying/homebuyingguide.pdf