FHA Home Requirements
Federal Housing Administration mortgages are known for their relatively low credit and down payment requirements, but the house you have your eye on may have to meet a higher bar.
The Department of Housing and Urban Development (HUD) requires all homes they insure to undergo an FHA appraisal. Part of the appraisal involves evaluating the current market value of the property and making sure the borrower (and by extension, the lender) isn’t paying more than the fair market value of the home.
Many lenders require borrowers to pay for an appraisal no matter which type of mortgage they get. But an FHA appraisal is typically more thorough because it’s designed to ensure the property meets HUD’s minimum property requirements. If you’re planning to use an FHA loan to buy your next home, this article will help you understand the different factors a home appraiser takes into consideration.
Why are there FHA home requirements?
There are several reasons for a home appraisal. When the FHA insures your home loan, your house serves as collateral. If you stop making your mortgage payments, the lender will foreclose on your home. At that point, the lender will sell your home to recover the money they lent you for the mortgage.
Minimum property requirements are designed to ensure the home is worth the money being lent. If the house is structurally unsound or unsafe to occupy, the lender may have trouble selling the property in the event of foreclosure.
In essence, the minimum property requirements protect the lender’s investment. But they also protect the borrower by ensuring you don’t pay more than the property is worth, purchase a home that threatens your health, safety or security or face expensive home repairs shortly after buying the property.
What are the property requirements for an FHA loan?
HUD’s minimum property requirements are designed to make sure any home insured by the FHA is:
- Safe. The property’s condition won’t threaten the health or safety of its occupants.
- Sound. The property is structurally sound – it has not decayed, deteriorated or been damaged in a way that may be of structural concern.
- Secure. The home can serve as good security for a mortgage loan.
To evaluate these factors, the appraiser looks at a variety of factors and reports the results on a Uniform Residential Appraisal Report. Besides information on the home itself, the report includes information on the neighborhood and real estate trends in the area, and comparisons to similar properties that have recently sold in the neighborhood.
The factors the appraiser will consider are outlined in detail in HUD Handbook 4000.1. Here’s a look at some of the criteria the appraiser will review:
- Encroachment. The property doesn’t intrude onto an adjacent property, and neighboring structures do not cross into the property line in a way that affects the property’s marketability.
- Power lines. Overhead electric power lines and drop service lines don’t cross directly over the structure, pool or other water feature.
- Access to the property. Pedestrians and vehicles can safely access the property from a public or private street.
- Hazards and nuisances. This can cover a variety of factors that can impact the safety and marketability of the property. “A health hazard might be the presence of mold,” said Casey Fleming, a mortgage adviser and author of the book, “The Loan Guide: How to Get the Best Possible Mortgage.” “A safety hazard might be a staircase without an adequate safety railing.” Meanwhile, a home located near an airport might be perfectly safe, but hard to sell due to noise issues.
- Gas or oil wells. If there are any abandoned gas or oil wells on the property, the appropriate local jurisdiction or state agency must verify that the well was abandoned in a safe manner.
- Living units. The home and any other living units on the property (such as guest houses or apartments) must have safe drinking water, access to safe sewage disposal and adequate living space. Any built-in appliances have to be operational.
- Electricity. All living units have to have power. Electrical switches should be functional, and outlets shouldn’t spark or smoke. There shouldn’t be exposed, frayed or unconnected wiring.
- Plumbing. The property’s plumbing system should have adequate water pressure and hot water, working toilets, sinks, bathtubs and showers.
- Furnace/heating system. The property must have an adequate heating system that relies on fuel that is readily obtainable.
- Swimming pools. Any swimming pools must comply with local ordinances.
- Structural conditions. The property’s foundation can withstand normal loads, and the structure of the property can be expected to last the life of the mortgage.
- Economic life. If the buyer plans to take out a 30-year mortgage, the home and the neighborhood should be reasonably expected to last another 30 years.
- Environmental. The home does not have any environmental hazards that would negatively impact the health and safety of its occupants.
- Lead-based paint. The home does not have any lead-based paint hazards.
- Methamphetamine contamination. The property has not been contaminated by the production or consumption of methamphetamine.
- Repairs. If repairs can be made that will make the property eligible for FHA financing, the appraiser will identify those repairs.
- Utilities. The property deed must reflect any utilities that are not located on easements that have been permanently dedicated to the local government or public utility body.
- Water supply. The property must be connected to a public water supply or a well that meets water quality standards established by a local health authority or the EPA. If the property does not have access to safe drinking water via a public water supply or well, the property must have a water purification system and a service contract for the ongoing maintenance of the property.
- Sewage system. The property must be connected to a public or community sewage disposal system, have a functioning onsite sewage disposal system or be connected to an off-site sewage system.
- Termites. The property must be free of wood-destroying insects and organisms. The appraiser may require a separate termite inspection.
- Flood zone. If the property is located in a flood zone, insurance under the National Flood Insurance Program must be available in the community.
- Residential use. If the property is also used for commercial uses, more than 49% of the total floor area of the property cannot be for non-residential use. The property must also comply with local zoning laws.
- Crawl space. If the home has a crawl space, it has to provide sufficient access to ductwork and plumbing. It must be adequately vented, free of trash, debris, insects and rodents and not have moisture issues.
- Foundation. The property’s foundation cannot be blocked or have inadequate access. There shouldn’t be evidence of water damage, cracks or erosion that could affect the home’s structural soundness.
- Attic. The home’s attic shouldn’t have signs of water damage, be unventilated, have fallen or disconnected heating or cooling vent pipes, evidence of rodent infestations or droppings, frayed or gnawed wiring or evidence of fire damage.
The appraiser might make a note of other wear-and-tear issues and cosmetic repairs in their report, but if these do not impact the safety, security and soundness of the property, they won’t affect the property’s FHA eligibility. HUD’s Resource Center suggests these cosmetic repairs might include “missing handrails that do not pose a threat to safety, holes in window screens, cracked window glass, defective interior paint surfaces […], minor plumbing leads that do not cause damage (such as a dripping faucet), and other inoperable or damaged components that do not pose a health or safety issue to the occupants of the house.”
How to find out if a home meets FHA property requirements
Unfortunately, there is no central database of single-family homes that are eligible for FHA financing. In general, as long as the cost of a single-family home falls within HUD’s FHA mortgage limits and meets the safe, sound and secure standards mentioned above, it should be eligible for FHA financing.
Before you start looking for a home to buy, talk to your real estate agent about your plans to use FHA financing. Your agent should be able to help you identify properties that are likely to meet the guidelines.
What if the property I want to buy doesn’t meet FHA home requirements?
If the home does not meet one or more of the standards listed above — maybe you’re interested in an older home or one that needs some TLC — the property isn’t immediately disqualified from FHA financing.
“The buyer doesn’t really have to do anything about these issues, as they should be flagged by the appraiser,” Fleming said. However, they will need to be addressed before you can close on the loan. “The real estate agents should take care of getting them done and seeing that the seller pays for them,” Fleming said.
If the seller can’t (or won’t) get the repairs done before closing, the lender may deposit funds to cover the repairs in an escrow account which the buyer can use to make the repairs after closing.
Is the property a real fixer-upper? In that case, you might be better off with an FHA 203(k) loan. The FHA’s 203(k) mortgage program allows buyers to finance both the purchase and cost of rehabilitation into a single mortgage.
Do all FHA loans have the same property requirements?
The requirements above apply to single-family houses, but FHA loans can be used to purchase other types of properties, which have their own property requirements.
To be eligible for FHA financing, a condo must be included on the FHA’s approved condominium project list and meet the requirements outlined in HUD’s Condominium Project Approval and Processing Guide. In general, those requirements include:
- Being in compliance with state and local laws and regulations
- Containing at least two dwelling units
- Using no more than 25% of the property for non-residential or commercial purposes
- Having no more than 10% of the units owned by one investor or entity
- Having no more than 15% of the total units more than 30 days past due on their condo association dues payments
- Allocating at least 10% of the budget to a reserves account to be used for maintaining common areas
- Carrying adequate insurance
The requirements for getting FHA financing on a manufactured home vary depending on whether the borrower owns the land the manufactured home sits on or leases a lot within a manufactured home community or mobile home park.
If the borrower owns the land, the property may be eligible for the same financing available to buyers of single-family homes if the manufactured home meets the following requirements:
- The home was designed as a one-family dwelling
- It is at least 400 square feet
- The home has a HUD Certification Label affixed, or the buyer has obtained a letter of label verification issued on behalf of HUD, confirming the home was constructed on or after June 15, 1976, in compliance with the Federal Manufactured Home Construction and Safety Standards
- The home is classified as real estate, even if it is not treated as real estate for purposes of state taxation
- The home is built and remains on a permanent chassis
- The home was designed to use as a dwelling with a permanent foundation built in accordance with the Permanent Foundations Guide for Manufactured Housing
- The home can only be transferred once – from the manufacturer or dealer to the site – and never moved again.
If the buyer leases the land on which the manufactured home sits, they may be eligible for an FHA Title I loan. Title I loans typically have lower maximum loan limits and shorter terms.
Much like the minimum property requirements for a single-family home, the requirements for condos and manufactured home are designed to ensure that the property is adequately maintained and will remain a desirable place to live.
The bottom line
If you’re having trouble finding a home that fits your budget and meets the property guidelines mentioned above, HUD’s minimum property guidelines may seem like an inconvenience. But keep in mind that these minimum standards are meant to protect taxpayers — the ultimate source of the funds used to insure FHA-backed loans — and homebuyers.
It might take you longer to find a property that will meet FHA standards, but if you know the minimum property guidelines, you’ll be better prepared to identify safe, sound and secure homes that are more likely to meet FHA loan standards.
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