What are the minimum property standards for an FHA loan? We discussed some of the basics in a previous blog post. Now let’s examine what the FHA loan rule book, HUD 4000.1, has to say about the minimum requirements for a home to be purchased with an FHA mortgage.
HUD 4000.1 instructs the lender, “The Mortgagee must underwrite the completed appraisal report to determine if the Property provides sufficient collateral for the FHA-insured Mortgage.”
“The appraisal and Property must comply with the requirements in Appraiser and Property Requirements for Title II Forward and Reverse Mortgages. The appraisal must be reported in accordance with Acceptable Appraisal Reporting Forms and Protocols.”
But the rules get more detailed in this area:
“The Mortgagee must confirm that the Structure of the Property will be serviceable for the life of the Mortgage. The Mortgagee must confirm that all foundations will be serviceable for the life of the Mortgage and adequate to withstand all normal loads imposed.”
As you can tell from the above, FHA loan rules have a lot to say about requirements on the basic minimum condition of the home. “Minimum Property Requirements refer to general requirements that all homes insured by FHA be safe, sound, and secure.”
No home is 100% perfect in every way, but even then many homes “pass” the appraisal process. But for those who worry that the house they want to buy is less than perfect, how is the lender required to proceed? Is the home automatically declared unsuitable for a home loan?
No. FHA loan rules state that many conditions that are able to be repaired may still be eligible for an FHA mortgage as long as those repairs are made. However, the following also applies from HUD 4000.1:
“When examination of a Property reveals noncompliance with the Property Acceptability Criteria, the Appraiser must note all repairs necessary to make the Property comply with HUD’s Property Acceptability Criteria, together with the estimated cost to cure.”
Note the language in the quote from HUD 40001. above, “cost to cure”.
This means that the appraiser will make a value judgment on the suitability of the home with the cost of those repairs in mind. In most cases, the repairs are required A) as a condition of loan approval and B) are required to be completed before the loan closes.
There are some exceptions, and borrowers who are purchasing a home using an FHA rehab loan will be subject to a different set of requirements in this area. It’s understood that a rehab loan is for a property that is not necessarily able to meet FHA minimum standards at the time of purchase, but must be brought into compliance at the end of the repair/renovation process.
Speak to a loan officer about the appraisal requirements for an FHA mortgage if you aren’t sure how these standards may affect your transaction, especially if you are interested in buying a fixer-upper home with an FHA rehab loan. You may be pleasantly surprised at the answers.