4/25/2016 — This blog entry, originally written in 2011 has been one of the most read posts on my site. While FHA loans are still an incredibly good choice for many buyers, there are now some 5% down payment conventional loans that are also extremely popular.
I did want to point out, as I edit this post, that, at least in our busy area, it’s definitely far less likely that a Seller will assist with a Buyer’s closing costs. The market is HOT, with multiple offers and Sellers are just less willing to pay anything out of pocket except their own expenses.
In my practice, FHA loans are used for the majority of home purchases. At the moment, without a doubt, an FHA 203(b) is the most logical choice. Credit score qualifications start at about 580 (depending on the lending institution involved), interest rates are awesome, the minimum down payment requirement is only 3 1/2%, closing costs run right around 3-3 1/2% of the purchase price (
although very often the seller is willing to assist with the Buyer’s closing costs).
However, one thing to remember is that not only do YOU, the buyer, have to qualify for a mortgage loan, the home must also qualify under typical FHA 203(b) loans (the most common type). A home in good repair with typical maintenance generally is no problem … it’s the home that’s been neglected that can so often be problematic–those homes may need a Rehab loan FHA 203(k) where the cost of home repair is included in the home loan. FHA wants to be sure that the home they insure … the one you’re buying … has no health or safety issues that could compromise your ability to repay your mortgage.
As you tour a home with your agent anticipating that you’ll use an FHA loan for purchase, watch for these items. The FHA appraiser that values the home for your bank loan will be watching for these items as well:
- Roofs that are at the end of their useful life, or in tough shape. Curling and missing shingles, gutters that are missing, lots and lots of moss. In our area, moss is common, but it should be minimal at best and easily removed with a light sweeping or cleaning. Most appraisers look for roofs that have an obvious 5 years or more life left in them. That original roof from a home built in the 1980’s or earlier could be problematic.
- Cracked or missing window panes. It’s certainly not necessary that the windows be newer — old, single pane windows can be just fine as long as they’re sound and in one piece. In a recent transaction, however, I did have an FHA appraiser insist that a window that had a broken seal (indicated by fogging between the panes) be replaced prior to closing.
- Peeling, cracked, or checked paint. Where the house is older than 1979, that paint could be lead based. Not a problem where the paint is in good shape, but where it could possibly be ingested — that can be a problem even on outbuildings. For that matter, abestos potential in a popcorn ceiling that’s falling down could also be an issue.
- Water issues. This is one of the biggest hot spots for an FHA appraiser, and rightly so. A quick glance under a sink to see rotting floors and moldy walls will nix a loan every time. Watch for soft floors around toilets and tubs, leaky faucets, roof leak stains in the ceiling. Water in the crawl space is a definite no-no as is significant water standing in the yard.
- Open/exposed wiring … Not good, not good. Electrical wires must be properly terminated, secured and finished in an electrical box and covered with the appropriate plate. Even outlet plates need to be in place.
- Missing electrical fixtures. Especially on foreclosure sales, the dining room light fixture is missing. Sometimes it’s all of the kitchen lights or bedroom center light fixtures.
- Missing appliances. A missing free-standing refrigerator, washer or dryer aren’t problems. It’s the built-ins such as a missing dishwasher, range, cooktop, or oven that’ll cause a comment in the Appraiser’s report. I’ll include the missing hot water heater and furnace here as well. A home has to have heat and water!
- Missing or damaged carpets, drywall, or typical finishes. Yeah, sometimes that plywood floor is a problem as are huge holes in the drywall where the previous owner got creative and cut through the sheetrock to find who knows what. Note, however, mere cosmetic issues are generally not a problem unless the carpet is so soiled with maybe pet stains that it’s not cleanable. Remember that the goal here is to have a home that is safe and healthy.
- Add-ons that were obviously not permitted. We’ve all seen them. The deck built on stilts that isn’t properly attached to the house, the garage/bedroom conversion with sloping floors, the rented basement apartment that doesn’t have its own meter and is accessible only through the main house door.
- Critters in the crawl space or attic. Ugh. But facts are that four-legged and/or winged creatures like to infiltrate the crawl space and attic if allowed. Evidence of lots of droppings and open foundation or attic vents can be an issue. Especially if the appraiser pokes his/her head up into the attic and is greeted by a pair of green eyes looking back at him. Not so good.
- Concrete cracks. A small crack typically isn’t necessarily a problem, but that foundation crack extending from top to bottom and is over, say, a 1/4″ or so can be an issue. Same thing in large cracks in garage floors or even walkways leading to the doors, especially where the surface is uneven or slabs have sunk.
- Septic or Sewer issues. A rehab loan or full repair will absolutely be needed to purchase a home with one of these problems!
A few things to remember:
- Not every FHA appraiser will note the same defects. Some appraisers will overlook moss on the roof, or a small corner crack in a window while others will insist that the item be corrected before the loan can close.
- Ideally, the Seller is able and willing to make repairs so that the home can be sold. However if that can’t be accomplished, the Buyer may need to pass on the home, change loan types, or make small repairs prior to closing (not a good idea, but it happens).
- Work with an agent that has experience with FHA transactions. He or she can often spot issues that will be problematic and can direct you to further resources as needed.
- Be absolutely certain that you are also working with an experienced FHA loan officer, especially if you decide to pursue an FHA 203(k) Rehab loan. You’ll need their help!