January 7, 2013
When you want to purchase a home with an FHA guaranteed home loan, the property you want to buy must be appraised to determine its eligibility for the loan.
A home that does not meet FHA minimum property requirements may not necessarily be ruled out for an FHA loan–an appraiser may note certain corrections that should be made to bring the home up to standard. In such cases, the loan may be approved contingent on those corrections being made. But can the expense of those corrections, when not paid by the seller, be included in the FHA loan amount?
FHA loan rules provide for this, stating under what circumstances repair or improvement costs can indeed be added to the loan. According to HUD 4155.1 Chapter Two, “Repairs and improvements may be added to the sales price before calculating the mortgage amount when the repairs and improvements are
–required by the appraiser as essential for property eligibility, and
–paid by the borrower, and
–sales contract or addendum identifies the borrower as responsible for payment, and completion of the repairs.”
There are guidelines for adding these costs to the loan. According to the same section of the FHA loan rulebook, “The repair and improvement amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of the
–amount that the value of the property exceeds the sales price
–appraiser’s estimate of repairs and improvements, or
–amount of the contractor’s bid, if available.”
One thing borrowers should keep in mind? The FHA rule which states, “Repairs and improvements completed by the borrower before the appraisal are not eligible to be included when calculating the maximum mortgage. This amount becomes part of the borrower’s required cash investment.”
FHA loan rules label the down payment amount as “the required cash investment”. In cases where repairs and/or improvements are added to the loan amount, expect to be asked for documentation of all costs, money paid, and other factors. Save all receipts and other paperwork for submission to the lender before the loan is closed.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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