FHA appraisals require repairs for conditions that rise above cosmetic defects, minor defects, or normal wear and tear. Appraisers must report ALL deficiencies. This information will assist your confidence that when a contract is accepted, property condition should not be a deal-breaker for you in terms of the appraisal.
What Does the Appraiser Look for?
So, what does the FHA appraiser look for during this process? The primary areas of inspection are the roof, the foundation, lot grade, ventilation, mechanical systems, heating, electricity, and crawl spaces (when present).
This is a list of the major conditions that may pose a risk to the health and safety of occupants or soundness of the property according to FHA. FHA will require automatic repair for:
- Cracked, broken, or damaged exit doors that are non-operable
- Plumbing leaks such as faucets
- Electrical box should not have any frayed or worn wires
- Damaged plaster or sheet rock or other wall and ceiling material
- Evidence of mold contamination
- Leaking or worn out roofs (for both house and garage). The roof should be in a good state of repair and must keep moisture from entering the home. It should “provide reasonable future utility, durability and economy of maintenance.” Expected life of the roof must be more than two years.
- Structural problems such as foundation damage. The foundation should be in good repair and able to withstand “all normal loads imposed” on it. Any defective structural conditions and any other conditions that could lead to future structural damage must be remedied before the property can be sold. These include defective construction, excessive dampness, leakage, decay, termite damage and continuing settlement.
- Peeling paint in homes built before 1978. Appraisers will also note peeling paint on exterior window or door frames.
- Missing components such as sink, toilet, cabinets, furnace, air conditioner, hot water heater, copper pipes, etc.
According to HUD Handbook 4150.2, the home “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants.” The bottom line is that if something poses a threat to the health and safety of the occupant, or to the structure itself, it will probably be marked as “subject to repair.”
What Happens If Appraiser Flags Item for Repair
If the home does not meet one of the above FHA property requirements, it is noted by the appraiser as needing repair. The loan is then considered “subject to repairs” being addressed. The lender will require that the condition be repaired prior to approving the loan. The solution is either for the seller to make the repairs prior to closing or the buyer can get a FHA 203K loan to fix the problem after the closing. Not all lenders offer the 203K loan so you will want to make sure that your lender is able to offer this if needed. If the buyer can show existing funds for the repairs, some banks will allow the buyer to set up an escrow holdback for repairs. Note that for FHA 203K financing, the lender will only approve the loan (purchase + repair) if no more than 110% of the after repair value of the property. Your real estate agent should provide you with an estimate of after repair value. Discuss options regarding lender required repairs with your loan officer.
Should You Get Conventional Loan for “Fixer-Upper”
Many buyers consider a conventional loan when considering a home that has property conditions that are problematic. Although conventional loans do not have the strict property requirements of FHA and VA loans, property condition is still considered. Conventional financing still requires inspection or repair of items that affect soundness, livability or structural integrity of the property.
Here is a list of property conditions that may be a problem for conventional financing. If the appraiser notes property condition issues, he may make the loan subject to completion of requirements or require additional inspections to assess the extent of the deficiency.
- Missing or non-functional furnace
- Cracks or settlement in the foundation
- Water seepage
- Active roof leaks
- Evidence of mold contamination
- Curled or cupped roof shingles, missing shingles or tiles
- Inadequate electrical service or plumbing leaks
- Non-functional kitchen (everything’s missing)
- Evidence of termite infestation
- Chipped or peeling exterior paint
Bottom line, if the home is considered to be in poor condition by the appraiser, conventional financing might not be an option either.
A home inspection should be completed prior to scheduling the appraisal. If these appraisal conditions are discovered by the home inspector, the buyer can negotiate with the seller to repair prior to the appraisal inspection being conducted. If the seller declines to repair, then the buyer can decide to walk away or explore options like a rehab loan like the FHA 203K or Homestyle Conventional Rehab loan to make the required repairs.
Sellers should also be aware of any potential property condition issues for their home. If possible, fix these problems before putting on the market. If the list of issues for a conventional appraisal is a problem, you may be looking at a cash buyer or buyer with rehab loan. In addition, these problems will negatively affect your home’s market value.
This is meant as guide for both buyers and sellers in understanding how property condition affects potential financing for homes. If you have further questions, please feel free to ask.