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What Are the Property Requirements for an FHA Loan?

Popular among first-time homebuyers but available to other consumers are home loans backed by the Federal Housing Administration (FHA). FHA loans are mortgages insured by the FHA and subsequently issued by an approved lender. These loans are geared toward low-to-moderate income borrowers. An FHA loan requires a significantly lower down payment than a traditional mortgage and comes with lower credit score requirements. In 2020, you were able to borrow up to 96.5% of the value of a home with one of these loans, and you needed a credit score of just 580 to make a down payment of 3.5%. With a 10% down payment, you might get approved with a credit score between 500 and 579.

If you’re financing a home purchase with an FHA loan, you might not be able to buy a particular property if it doesn’t meet the requirements. The FHA has minimum property standards as a way to protect lenders.

Why Minimum Property Standards?

If you’re getting a mortgage as a homebuyer, the property itself is your loan collateral. If you stop making your payments, the lender will foreclose on it eventually, taking possession. Then, the lender sells the house to try and recoup as much of the money owed on the loan as they can.

When a property is required to meet specific standards, the lender has a higher level of protection. The idea here is that it should be easier to sell and get more money if the home meets said standards.

There’s also a protective element if you’re the borrower. For example, you’re less likely to face unexpected repair expenses right away.

FHA Home Appraisals

If you want an FHA-backed mortgage, then the house you’re trying to buy must have an appraisal meeting specific standards. A home appraisal is an estimate of the property’s market value performed by a neutral third party. Most mortgages require an appraisal. The market value assesses the loan-to-value ratio of a mortgage.

An FHA appraisal requires two steps. The first is a site visit where an FHA appraiser will visit the home personally, taking photos and notes. Then, the second step requires the appraiser do market research to look at comparable homes that recently sold in the area. From there, they can estimate a value.

Minimum Property Standards

According to the U.S. Department of Housing and Urban Development (HUD), when the FHA finances with its loan products, there have to be three general standards met. The first is safety. The property should maintain the safety and health of the occupants.

The second is security, and the third is soundness. That means the property shouldn’t have any conditions or deficiencies impacting the structural integrity.

If you’re going to buy a single-family, detached home, the appraiser uses what’s called a Uniform Residential Appraisal Report. The form goes over the basic elements of the house, such as the year it was built and the square footage. On the form, the appraiser also has to describe the property's condition, including any repairs that may be needed or adverse conditions that could impact livability or structural integrity.

If you’re planning to buy a condo, the form is similar, but there are questions specific to the property type like the number of owner-occupied units and the common areas.

If problems are minor or cosmetic, they don’t need to be repaired, according to the FHA. Examples of what’s considered minor in this context include missing handrails, minor plumbing leaks, or worn-out countertops.

Health and Safety Hazards

Some of the things that do need to be repaired for a sale to close include:

  • Electrical issues like exposed or frayed wires
  • Roofing is not expected to last for at least two more years
  • Water heaters that don’t meet local building codes
  • Excessive noise
  • Construction dampness
  • Termite damage
  • Asbestos

If you’re a home buyer and have your heart set on a home with potential problems, you have options. For example, you can ask the seller to make the repairs. If they can’t, maybe as a buyer you request a lower price to make up for it. If the seller is a bank, they’re not likely to make repairs so you’re probably going to have to find another property or try and get approval through a different loan product.