When an FHA loan applicant finds a home they are serious about purchasing, an offer is made for the property and a process is set in motion that leads to the FHA loan being approved or denied. When the loan is approved, it means the property has been appraised by an FHA-approved appraiser.
In some cases a home may pass the appraisal process with few or no required improvements or repairs. In other cases a home may be rejected as unsuitable because of the condition of the property, but in many other cases a home may be approved for an FHA mortgage provided certain repairs or improvements are made as a condition of the sale.
In such cases, depending on the repairs, the borrower or seller may be required to make the changes and there may be some additional negotiations necessary to determine who pays.
Did you know in some cases when the borrower pays for the repairs, the cost of those repairs may be included in the FHA mortgage amount?
According to FHA rules, “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…”
The rules also state these repairs must be paid by the borrower in order to be included in the loan. The borrower cannot add costs to the loan that are paid for by the seller. Additionally, there must be documentation of these expenses listed in the sales contract or an addendum to the sales contract.
That documentation must note that the borrower is responsible for the repairs and the payment for them. Including the details in this way insures transparency in the FHA loan process and prevents the FHA loan from including payment for services or upgrades not actually performed.
The ability to include repair and alterations costs into the amount of the loan in situations like these is limited to only those repairs required by the appraiser. Options, cosmetic fixes or add-ons not required by the appraiser will not be included in the FHA loan amount.