Friday, January 19, 2024 / by Amy Brown
Let's start with buyers:
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are often a good fit for first-time home buyers or people with little savings or credit challenges.
The federal government doesn’t issue FHA loans, but it does insure them. FHA loans are issued by private, FHA-approved lenders, including many banks, credit unions and nonbanks (a type of lender).
FHA vs. Conventional Loans
FHA Loan Requirements
The FHA sets minimum requirements for borrowers seeking an FHA loan. However, each FHA-approved lender can determine its own underwriting standards, so long as those requirements are in line with the minimums set by the FHA.
For example, a lender can specify the minimum credit score that they are willing to accept and they set their own interest rates and fees. Bottom line...shop around.
Credit Score Requirements for FHA Loans
HUD requires that all appliances that “remain and that contribute to the market value opinion are operational.” Make sure these major appliances are in good working order: 2. Adequately insulated and safe attic
3. Dry and ventilated crawl spaces and basements
Lenders can reject properties for “significant incurable ponding of water” in basements and crawl spaces.Every crawl space must be readily accessible for an appraiser to enter up to their head and shoulders at a minimum. Crawl spaces must be free of debris, with good airflow and no pooled water.In the basement, appraisers look for any moisture, dampness, and structural issues that might pose a health risk or compromise the home’s integrity. They also test sump pumps to ensure they are functioning correctly.
4. Sufficient drainage and grading
The appraiser checks for “readily observable evidence of grading and drainage problems.” This entails looking for effective drainage control measures like gutters, downspouts, and appropriate grading to deliver water away from the structure. The appraiser will note standing water if it seems related to a drainage issue.Proper grading directs rainwater on the roof and the ground away from the structure’s foundation. If existing grading does not allow for proper drainage, the FHA appraiser will require the seller to address the issue.
5. Adequate and functioning electrical system
The electrical system should adequately support the usage and functions that typically occur in the home. Frayed or exposed wires are not permitted. The appraiser tests switches, receptacles, and fixtures to ensure they work.
6. Reasonably safe site conditions
The appraiser looks at “externalities,” or off-property issues that affect the home’s value and marketability. Some environmental issues could make a property less safe.
Externalities include: 7. Solid foundation
HUD requires repairs for safety problems and deficiencies that comprise the foundation’s integrity. Poor drainage and soft soil commonly cause cracks, leaks, and bowing in a structure’s foundation. The FHA appraiser records defects and structural issues that he or she observes during the inspection.
As the seller, you may have to get an inspection from a licensed structural engineer. Repair costs for foundation problems range from a few hundred dollars for minor cracks up to several thousand dollars to install underpinning piers or steel reinforcements.
8. Adequate heating and cooling
HUD requires heating and cooling systems equipped to keep the living space comfortable and healthful.
Every habitable room must have a heat source that uses fuel readily available in the local geographic area.
While central air is not an FHA requirement, any existing central air system must be operational.
9. No disturbed lead paint
This applies to any home built before 1978.
10. Well functioning plumbing
The appraiser flushes toilets and turns on faucets to verify the property’s plumbing system provides adequate water pressure, flow, and waste removal. Faucets should supply hot and cold water with no unpleasant odors.
The water heater should contain a temperature and pressure-relief valve diverting hot water and steam safely. Signs of leaks or structural damage near faucets and pipes are reportable issues.
During the FHA appraisal, the appraiser checks septic systems, as well. The appraiser observes septic systems for “signs of failure or surface evidence of malfunction.” Required repairs depend in part on local guidelines, the extent of the damage, the lender’s discretion.
11. Stable roof with two or more years of life left
The roof covering should provide a barrier against moisture and provide “reasonable future utility, durability, and economy of maintenance;” basically, the roof must be in solid condition and not require major repairs that could be costly to the buyer.
If the appraiser feels the roof has less than two years of remaining life, they will require an additional inspection from a professional roofer.
What happens next?
If you decide that you would like to accept FHA borrowers when you list your home for sale, make sure that the above criteria is up to shape BEFORE you list the house so that you aren't asked for any type of concessions during the due diligence period and you get as close to your contracted price as possible.
If a discrepancy is found, it will have to remedied and reinspected before the loan can close. The burden of that responsibility usually falls on the seller, however, sellers can refuse. Just know, that unless the borrower has the money to pay for the repair out of their own pocket, more than likely the deal will not go through as this is a loan requirement for purchase.
If a buyer really wants to go ahead with the purchase, the seller has declined any repair requests, but they don't have the money to pay out of pocket, the last option is to obtain an FHA 203(b) loan which gives the borrower up to $10,000 and 90 days to complete the repairs which they can finance into their total loan amount.
I know that this was a bit of a long read but I appreciate you taking the time. I hope that this sheds some clarity on the responsibilities of both sides when encountering an FHA loan scenario.
FHA loans can be a great program to get someone into a home that just needs a little bit of a boost. Just know that as a seller your property will need to meet certain requirements to seal the deal. Knowing these ins and outs can save you a lot of time, money, and frustration.
We are here to help and shed some light on buying real estate in the Asheville area!