April 25, 2014
When it comes to FHA appraisals, some borrowers and sellers have a common question. Can the cost of a repair or improvement be added to the sales price of the home? If an FHA appraiser requires the upgrade, repair or improvement, does this expense have to be negotiated separately instead?
FHA loan rules covering this question are found in HUD 4155.1 Chapter Two Section A, which explains:
“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”.
But there’s more. These repairs must be included in the sales contract or an addition to the contract stating that the borrower is responsible for the payment of these repairs.
FHA loan rules in this section also add, “Only repairs and improvements required by the appraiser may be included.”
How is the amount to be added to the loan calculated? Chapter Two says, “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.”
There are limitations to this process. Chapter Two clearly states that ONLY repairs done after the appraisal are allowed. “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.”
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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