The Federal Housing Administration’s accommodating lending standards help financially challenged Americans achieve the dream of homeownership. But buyers may be surprised to learn that FHA has minimum standards for the property condition that can potentially throw a monkey wrench into your purchase plans. What are these FHA requirements, and why does FHA require them?
The purpose of FHA’s standards
The FHA’s minimum property condition standards are intended to protect both the mortgage lender and the homeowner. Knowing that the property meets the standards gives the lender assurance it will be able to sell the property should it have to foreclose. Additionally, when a house has problems, a financially stretched homeowner may be tempted to walk away and default on the loan. A home that meets the standards is also a better deal for a buyer.
Knowing about the FHA requirements before you start your home search will save you from wasting time on a house that will not meet the property condition standards.
What are the standards?
The standards are reasonable, not picky. They cover three fundamental areas: safety, security and soundness. During the purchase process, an FHA-approved inspector will appraise the house and complete a Uniform Residential Appraisal Report. The FHA requirements include standards such as these.
- Electrical wiring at the breaker panel must not have frayed or exposed wires.
- All habitable rooms must be able to receive heat.
- The roof must keep out moisture and have no more than three layers of roofing. If a repair is needed and the roof already has three layers, FHA requires a whole new roof.
- The structure must be sound and not at risk of future instability caused by poor construction, water damage, rot, wood-destroying insect damage, or foundation shifting or excessive settling.
- The house cannot be within set distances of high voltage electrical lines, gas or oil wells or their lines, airports, heavy traffic, TV and radio transmission towers or hazardous waste sites.
- If the home contains asbestos, the substance must not be deteriorating or damaged, since airborne asbestos is hazardous.
- The home must have a sink, shower and toilet.
- The house must have a functioning water heater that meets building code requirements.
This is not a comprehensive list, but these examples show that the FHA requirements are meant to ensure the house is a habitable home. Many flaws, such as cracked windows or missing stair railings, will not violate the FHA requirements.
What if the house fails to meet the standards?
Defects on the FHA list must be repaired before the deal can close. The buyer can ask the seller to make the repairs. If the seller is unwilling or unable to afford the repairs, the price can be negotiated downward so the buyer has money for the repairs, or upward so that the seller can pay for them now and recapture the cost at closing. If the seller refuses both these options, the buyer will need to either find a new source of financing for the home, choose a different home, or pursue funding from the FHA 203K loan program for buying and rehabilitating a house that needs repairs.