FHA Mortgage Underwriting Requirements for repairs are really quite different than they were several years ago, before there were so many foreclosed and distressed homes on the market in North Carolina. In 2011, FHA Home Loan Financing is one of the most popular programs available, because it is “forgiving” to folks who have had some credit challenges, it only requires a 3.5% down payment, the downpayment can be a gift, and you can purchase the property with a non-occupying co-borrower (a family member).
At the same time, Home Buyers are looking for a great deal – and this often means that they are looking for properties that are foreclosed, bank owned, short sales or… in other words have some “DIY” repair opportunites that need to be made.
The question becomes, what repairs will FHA Guidelines require be done BEFORE closing, and which items can the home buyer do once they have ownership?
When considering ANY property issue, it’s important to remember that FHA is basically concerned about three things:
- Health and safety issues
- Protecting the security of the property, and
- Structural soundness of the property.
FHA pretty clearly lays out exacting what their minimum property standards are, which repairs can be “deferred” and which ones need to be made right away. However, we are seeing another recent round of Lender Guideline overlays for credit and appraisal issues. Some Lenders, for instance will allow us to do a FHA Streamline Refinance with NO Appraisal, or Inspection – others will not. The point being, just because the FHA Guidelines do not require an improvement, doesn’t mean an UNDERWRITER will be satisfied.
When FHA Minor Repairs May Not Be Required:
Houses that have a cracked window pane, some caulking that’s ready to be redone or worn carpet will not be the same headache when applying for a FHA mortgage it might have been 6 years ago. Because FHA is now focused on those items that affect the safety of the property or the occupants, the appraiser can mark the house in “as is” condition.
Be aware though, that even though the appraiser / underwriter is not requiring repairs be made, they will still consider the overall condition of the home, and how that condition affects the value of the home. Again, because their job is to protect the Bank – the UNDERWRITER for the Bank, can still require repairs, based upon the appraisers notes, as a basis for making the loan.
Items The Appraiser Might Not Require To Be Fixed Include:
- Missing Handrails
- Cracked or damaged exit doors that are otherwise operable (note – Garage to Kitchen Doors should be fire proof)
- Cracked window pane glass
- Defective paint surfaces in homes constructed after 1978
- Minor plumbing leaks (e.g. as leaky faucets)
- Defective floor finish/covering
- Evidence of previous (non-active) Wood Destroying Insect/Organism damage
- Rotten or worn-out counter tops (Active Leaks should be fixed)
- Damaged plaster, sheetrock or other wall and ceiling materials in homes (Active Leaks should be fixed)
- Poor or sloppy workmanship
- Trip hazards (uneven pavement, or cement walkways)
- Crawl space with debris
- Lack of all-weather driveway surface
- Lack of or ripped screens for windows
Items You Can Count On Repairing:
- Lead paint suspected in homes constructed before 1978 – Peeling paint in these homes where it’s possible that the “underlying” surface might contain lead paint will need to be fixed.
- OUTBUILDINGS that appear to have lead paint. This is huge in NC, where you can easily purchase a home, with 2 or 3 “sheds” on the property that are not living units. If it appears the building was constructed prior to 1978, and has peeling paint that MIGHT be lead paint on an under surface – it will need to be fixed.
- Inadequate access/egress from bedrooms to exterior of homes. A recent example of this was a loft Bedroom with a ladder propped up for access to the lower units. Should be permanent.
- Leaking or worn out roofs. Depending on the Lender, this can be a “biggie.” We’ve seen one bank require roof inspections if the Appraiser noted the roof appeared to be at least 10 years old.
- Evidence of structural problems. Again, a 100 year old house with pilings and sagging floors? Count on a Structural Inspection being required.
- Standing water against the foundation and/or excessively damp basements – especially if there’s a concern or evidence of mold
- Hazardous materials on the site or within the improvements. In NC we have a problem with OIL Tanks buried in the ground.
- Faulty or defective mechanical systems, if there’s evidence of an active leak, or lights don’t work in a bathroom, heating won’t cut on… expect to have an inspection required, or repairs made. The appraiser is not checking everything about the system like an Inspection Report, they are checking to see “basically” does it appear to even work. We had one Bank Owned Property where the appraiser went in, and there was 2 inches of water on the kitchen floor… the leak has to be fixed PRIOR to closing!
- Missing Heating Units, Stoves, Fixtures. If the heating unit has been stripped from the property, or the stove is missing – FHA is going to require that those items are replaced – meaning they are on the list Seller Required Repairs. If you still want to purchase the property, they will have to be put in prior to closing.
Again, based on the security and soundness of the property, if the home has a noted problem that could pose a threat, the lender will require an inspection of the condition to determine whether repairs are necessary to resolve the problem.
Various FHA Inspection Requirements:
FHA (and most Banks) do NOT require a Termite report, although living in NC – it is STRONGLY suggested that you have one! In most cases, we are also not required to get a well and septic report (again, we think you should have one). If you are purchasing a property with a community water / septic system, a private road, a well or septic system – we suggest that you speak with your loan officer about what documentation will be required. Each Lender has “over lays” and you need to learn about this upfront.
Final Thoughts About Home Inspections:
We think getting a Home Inspection before you purchase a home is SMART. Please note that as of December 2011 – here’s the reality of what we are seeing with Home Inspections: If you choose to have a home inspection, AND you choose to show that home inspection on the HUD 1 (as opposed to paying it outside of closing) the Underwriter will likely require to see it, and any noted repairs on the report will be REQUIRED to be made. This is important to note… because if you put it on the HUD 1, closing statement, that means the Underwriter is being notified of the report HOURS before closing. Again, this is something we should probably talk about.
Want to know more about how to purchase a Foreclosed Home in North Carolina, and the Repairs Sellers are Required to Make? We’d love to talk to you about how to make this work! Please call Steve Thorne, Mortgage Banker in Cary 919-649-5058. We offer FHA 203k Loans which are renovation loans, and we have NC Housing Finance Agency money available to work with FHA mortgage loans too!