Homebuyers intending to finance a home purchase with a Federal Housing Administration (FHA) loan sometimes receive a nasty surprise: They won't be allowed to purchase a particular property because it doesn't meet FHA requirements. Why do these requirements exist, what are they, and can they be remedied so buyers can purchase the homes they want? (For more, check out Understanding FHA Home Loans.)
Why the FHA Establishes Minimum Property Standards
When a homebuyer takes out a mortgage, the property serves as collateral for the loan. In other words, if the borrower stops making the mortgage payments, the mortage lender will eventually foreclose and take possession of the house. The lender will then sell the house to reclaim as much of the money still owed on the loan as possible. (To learn more about this process, see The 6 Phases of a Foreclosure.)
Requiring that the property meet minimum standards protects the lender. It means that the property should be easier to sell and command a higher price if the lender has to seize it. At the same time, this requirement protects the borrower: It means he or she will not be burdened with ruinous repair bills from the start, and, with a fundamentally sound place to live, the borrower has more incentive to make payments during difficult financial times to keep the home.
What Are Minimum Property Standards?
According to the U.S. Department of Housing and Urban Development (HUD), the FHA requires that the properties financed with its loan products meet the following minimum standards:
- Safety: The home should protect the health and safety of the occupants.
- Security: The home should protect the security of the property.
- Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.
HUD then describes the conditions the property must meet to fulfill these requirements. An appraiser will observe the property's condition during the required property appraisal and report the results on the FHA's appraisal form. (Property appraisals are one of many requirements that buyers fulfill before settling on a deal – for more, see Housing Deals That Fall Through.)
For single-family detached homes, the appraiser is required to use a form called the Uniform Residential Appraisal Report. The form asks the appraiser to describe the basic features of the property, such as the number of stories, year it was built, square footage, number of rooms and location. It also requires the appraiser to "describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.)" and asks, "Are there any physical deficiencies or adverse conditions that affect the livability, soundness or structural integrity of the property?" The condominium unit appraisal form is similar but has condo-specific questions about the common areas, homeowners association, number of owner-occupied units and so on. (See also: What You Should Know About Home Appraisals.)
The FHA does not require the repair of cosmetic or minor defects, deferred maintenance and normal wear if they do not affect the safety, security or soundness of the home. The FHA says that examples of such problems include but are not limited to the following:
- Missing handrails
- Cracked or damaged exit doors that are otherwise operable
- Cracked window glass
- Defective paint surfaces in homes constructed post-1978 (because of lead paint hazards)
- Minor plumbing leaks (such as dripping faucets)
- Defective floor finishes or coverings (worn through the finish, badly soiled carpeting)
- Evidence of previous (non-active) wood-destroying insect/organism damage where there is no evidence of unrepaired structural damage
- Rotten or worn-out counter tops
- Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post-1978
- Poor workmanship
- Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
- Crawl spaces with debris and trash
- Lack of an all-weather driveway surface
There are many areas, however, where the FHA does require problems to be remedied in order for the sale to close. Here are some of the most common issues that homebuyers are likely to face. (If you are buying a home, check out Top Tips For First-Time Home Buyers.)
Electrical and Heating
- The electrical box should not have any frayed or exposed wires.
- All habitable rooms must have a functioning heat source (except in a few select cities with mild winters).
Roofs and Attics
- The roofing must keep moisture out.
- The roofing must be expected to last for at least two more years.
- The appraiser must inspect the attic for evidence of possible roof problems.
- The roof cannot have more than three layers of roofing.
- If the inspection reveals the need for roof repairs, and the roof already has three or more layers of roofing, the FHA requires a new roof.
The water heater must meet local building codes and must convey with the property.
Hazards and Nuisances
A number of conditions fall under this category. They include but are not limited to the following:
- Contaminated soil
- Proximity to a hazardous waste site
- Oil and gas wells located on the property
- Heavy traffic
- Airport noise and hazards
- Other sources of excessive noise
- Proximity to something that could explode, such as a high-pressure petroleum line
- Proximity to high-voltage power lines
- Proximity to a radio or TV transmission tower
The property must provide safe and adequate access for pedestrians and vehicles, and the street must have an all-weather surface so that emergency vehicles can access the property under any weather conditions.
Any defective structural conditions and any other conditions that could lead to future structural damage must be remedied before the property can be sold. These include defective construction, excessive dampness, leakage, decay, termite damage and continuing settlement. (For more tips on buying a home, read 10 Worst First-Time Homebuyer Mistakes.)
If an area of the home contains asbestos that appears to be damaged or deteriorating, the FHA requires further inspection by an asbestos professional.
The home must have a toilet, sink and shower. (This requirement might sound silly, but you'd be surprised what people will take with them when they're foreclosed on, and what vandals will steal from a vacant house.)
Anecdotal evidence suggests that the FHA requires properties to have working kitchen appliances, particularly a working stove. However, FHA documents do not mention any requirements regarding appliances.
This is not an exhaustive list. For additional information, consult the Department of Housing and Urban Development's Homeownership Center (HOC) Reference Guide.
Homebuyer Remedies for Properties Below Minimum Standards
What's a homebuyer to do after falling in love with a property that has one of these potentially deal-killing problems?
The first step should be to ask the seller to make the needed repairs. If the seller can't afford to make any repairs, perhaps the purchase price can be increased so that the sellers will get their money back at closing. Usually, the situation works the other way around – if a property has significant problems, the buyer will request a lower price to compensate. However, if the property is already priced below the market or if the buyer wants it badly enough, raising the price to ensure the repairs are completed and the transaction closed could be an option.
If the seller is a bank, it may not be willing to make any repairs. In this case, the deal is dead. The property will have to go to a cash buyer or a non-FHA buyer whose lender will allow them to buy the property in the present condition. (See also: 7 Things to Know About FHA Home Loans.)
Many homebuyers will simply have to keep looking until they find a better property that will meet FHA standards. This reality can be frustrating, especially for buyers with limited funds and limited properties in their price range. Unfortunately, sometimes it is the only solution.
Some homebuyers may be able to gain approval for a different loan product. A non-FHA loan may provide more leeway on what condition the property can be in, but the lender will still have its own requirements, so this is no guarantee. Another option is to apply for an FHA 203(k) loan, which allows the purchase of a home that has significant problems. (Learn more in An Introduction to the FHA 203(k) Loan and Applying for an FHA 203(k) Loan.)
The Bottom Line
FHA loans make it easier for borrowers to qualify for a mortgage, but they don't necessarily make it easier to buy a property. Many homebuyers will simply have to keep looking until they find a better property that will meet FHA standards—a process that can be frustrating, especially for buyers with limited funds and few properties in their price range.
However, FHA borrowers who know what to expect when home shopping can restrict their search to properties that are likely to meet FHA guidelines, or at least avoid setting their hopes on a fixer-upper property before having it appraised. (For related reading, take a look at Buying a Foreclosed Home and Mortgage Basics.)