Brush Up on These 13 FHA Loan Property Requirements Before the Appraisal

If you’re selling to a buyer backed by an FHA loan, your home must clear an FHA appraisal for the loan to close. The FHA appraisal determines a property’s market value and ensures that the property meets the U.S. Department of Housing and Urban Development’s (HUD) minimum property requirements.

For context, the Federal Housing Administration created the FHA loan program to help more Americans afford houses with government-insured home loans that are easier to qualify for than most conventional loans. Borrowers can qualify for an FHA loan with a credit score as low as 500 with a 10% down payment, or 580 or above with a 3.5% down payment. By contrast, most conventional loans require a credit score of 620 or above. Additionally, an FHA-backed buyer may have a slightly higher debt-to-income ratio to qualify than they would with most conventional loans.

While most mortgage lenders require an appraisal before approving a home loan, HUD requires a special type of appraisal for FHA loans to confirm the property is safe, secure, and worth the price. This process protects the buyer from purchasing a home that needs more maintenance than they can afford. It also protects the government’s interest since it’s on the hook for paying off the buyer’s debt to the lender if the buyer defaults on their mortgage.

To ensure your home passes the FHA appraisal, we’ve enlisted a trusted real estate agent and an FHA appraisal expert for insight on FHA loan property requirements. After all, if your home falls short of these guidelines, it could cost you the sale.

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Minimum property requirements for FHA loan approval

It’s the licensed FHA home appraiser’s job to inspect the home from top to bottom, note areas of concern, and mandate repairs to bring the property into compliance with HUD’s minimum property requirements.

Overall, FHA appraisers use HUD’s guidelines to evaluate the interior and exterior of the property for:

• Safety: Protects the occupants’ health and safety
• Security: Protects the property’s security
• Soundness: Ensures the property is structurally sound without problems that compromise its integrity

The lender cannot approve the buyer’s loan until the seller resolves any significant issues discovered in the appraisal. Here are 13 FHA loan property requirements you’ll need to comply with to close the sale:

1. Operational appliances

HUD requires that all appliances that “remain and that contribute to the market value opinion are operational.” Make sure these major appliances are in good working order:

• Dishwashers
• Garbage disposals
• Microwave ovens
• Ovens/ranges
• Refrigerators
• Washers and dryers

During the inspection, the FHA appraiser makes a note of which appliances are present. If you’re taking appliances to your next home, the appraiser will write that in the report and consider the loss of appliances when valuing the property. Existing but non-functional appliances are classified as “deferred maintenance” in the appraisal.

2. Adequately insulated and safe attic

An FHA appraiser will inspect the attic for the following:

• Lack of insulation on the interior roofing
• Deficient materials
• Leaks or readily observable evidence of significant water damage
• Previous fire damage
• FRT sheathing
• Exposed and frayed wiring
• Inadequate ventilation by vent, fan, or window

To give the appraiser an unobstructed view of the attic roof and flooring, move stored items out of the way. You’re not required to cut walls, ceilings, or floors to provide access. However, if the appraiser cannot enter the attic by head and shoulders, they will note so in the report.

3. Dry and ventilated crawl spaces and basements

Lenders can reject properties for “significant incurable ponding of water” in basements and crawl spaces.

Every crawl space must be readily accessible for an appraiser to enter up to their head and shoulders at a minimum. Crawl spaces must be free of debris, with good airflow and no pooled water.

In the basement, appraisers look for any moisture, dampness, and structural issues that might pose a health risk or compromise the home’s integrity. They also test sump pumps to ensure they are functioning correctly.

4. Sufficient drainage and grading

The appraiser checks for “readily observable evidence of grading and drainage problems.” This entails looking for effective drainage control measures like gutters, downspouts, and appropriate grading to deliver water away from the structure. The appraiser will note standing water if it seems related to a drainage issue.

Proper grading directs rainwater on the roof and the ground away from the structure’s foundation. If existing grading does not allow for proper drainage, the FHA appraiser will require the seller to address the issue. Significant grading issues are best left to the professionals to prevent costly water damage.

5. Adequate and functioning electrical system

The electrical system should adequately support the usage and functions that typically occur in the home. Frayed or exposed wires are not permitted. The appraiser tests switches, receptacles, and fixtures to ensure they work.

If the appraiser cannot access or test any electrical units for any reason, they can request certification from a licensed electrician to verify these are functional and safe, according to Ryan Keane, President of Pinelands Appraisal, Inc.

6. Reasonably safe site conditions

The appraiser looks at “externalities,” or off-property issues that affect the home’s value and marketability. Some environmental issues could make a property less safe.

Externalities include:

• Heavy traffic
• Airport noise and hazards
• High-pressure gas lines
• Overhead power lines
• Stationary storage tanks
• Noxious fumes

Natural disasters also play a role in FHA approval. If your property is in an area prone to floods, wildfires, or mudslides, the lender may require disaster insurance or reject the loan altogether. According to the HUD Single-Family Housing Policy Handbook, “The Appraiser must report the presence of Externalities so that the Mortgagee can determine eligibility.”

7. Solid foundation

HUD requires repairs for safety problems and deficiencies that comprise the foundation’s integrity. Poor drainage and soft soil commonly cause cracks, leaks, and bowing in a structure’s foundation. The FHA appraiser records defects and structural issues that he or she observes during the inspection.

As the seller, you may have to get an inspection from a licensed structural engineer. Repair costs for foundation problems range from a few hundred dollars for minor cracks up to several thousand dollars to install underpinning piers or steel reinforcements.

8. Adequate heating and cooling

HUD requires heating and cooling systems equipped to keep the living space comfortable and healthful.

Every habitable room must have a heat source that uses fuel readily available in the local geographic area. Properties in warmer climate regions of Hawaii and Florida are exempt from this requirement.

Homes with wood stoves and solar systems must also have conventional heating units that maintain a temperature of at least 50 degrees Fahrenheit. As described in the HUD HOC Reference Guide, space heaters and other non-conventional heat sources must comply with local jurisdictions. However, they are not usually considered acceptable primary heat sources.

While central air is not an FHA requirement, any existing central air system must be operational. The appraisal report lists any central air issues, along with recommended remedies and estimated repair costs.

9. No disturbed lead paint

In 1978, the federal government banned consumer use of lead-based paint after discovering lead causes serious health problems in humans. Structures built prior to 1978 may contain lead paint.

During an FHA appraisal, the inspector looks for surface craving, peeling, and other defects that potentially expose underlying lead paint beneath. That includes windows, doors, railings, sheds, and other outbuildings.

Paint is one of the most common issues Keane has seen in his 27 years of experience as an FHA appraiser. He says chipping and peeling paint is an easy fix: “The loose paint is scraped off then repainted with a new oil or latex paint. This is a sufficient method to eliminate the hazard.”

If the property was built before 1978, but the appraiser does not see any chipping, flaking, or peeling, he or she does not have to mention the existence of lead paint in the report’s section for deficiencies or adverse conditions.

10. Well functioning plumbing

The appraiser flushes toilets and turns on faucets to verify the property’s plumbing system provides adequate water pressure, flow, and waste removal. Faucets should supply hot and cold water with no unpleasant odors.

The water heater should contain a temperature and pressure-relief valve diverting hot water and steam safely. Signs of leaks or structural damage near faucets and pipes are reportable issues.

During the FHA appraisal, the appraiser checks septic systems, as well. The appraiser observes septic systems for “signs of failure or surface evidence of malfunction.” Required repairs depend in part on local guidelines, the extent of the damage, the lender’s discretion.

It’s good maintenance to have your septic system professionally inspected and pumped every three to five years to prevent unwanted surprises when you go to sell your property.

11. Stable roof with two or more years of life left

The roof covering should provide a barrier against moisture and provide “reasonable future utility, durability, and economy of maintenance;” basically, the roof must be in solid condition and not require major repairs that could be costly to the buyer. The appraiser records the roofing material (shingle, clay, wood, slate, aluminum, etc.) and the roof’s overall condition.

The appraiser views the roof from the ground up to evaluate its integrity. He or she will examine roof features, including skylights, flashing, drainage systems, and chimneys, for leaks and other visible defects.

The appraiser also reports missing or deteriorated roof materials and looks at the interior ceilings for water damage that indicates a roofing problem. If the appraiser feels the roof has less than two years of remaining life, they will require an additional inspection from a professional roofer.

12. Maintained swimming pool

The report notes whether a swimming pool is in-ground or above ground. Above-ground pools are considered personal property and not factored into the property’s appraisal.

A swimming pool should be operational with no defects. Sellers must repair damaged or unstable pools. Common swimming pool problems include small cracks in the cement and leaks around lights and pumps. The appraiser may or may not require repairs for these issues.

Algae and dirt are not an inspection issue, so you won’t need to clean the pool for approval. Appraisers are to assume pools that are covered and “winterized” in the cooler months can be operational at a reasonable cost when reopened.

13. No presence of termites

The appraiser reports evidence of termites and other wood-destroying insects. If the appraiser sees signs of termite damage or termite treatment, they will order a more in-depth inspection from a professional pest control expert.

Resources to learn more about FHA loan property requirements

We’ve covered the basic FHA loan property requirements to help you prepare for the appraisal process. To explore HUD’s requirements in greater detail, visit the FHA SingleFamily Housing Policy Handbook, Condominium Project Approval, and the HUD HOC Reference Guide.

What sellers can expect from the FHA appraisal process

“A typical FHA appraisal inspection takes about 30 minutes to complete. It generally takes a few days to complete the report, which is then submitted to the lender for review,” Keane shares.

The lender reviews the report and gives a copy to the borrower for their review. “If there are any repairs required, the Realtors® are notified, and the repairs will need to be inspected prior to closing.” The most common issues Keane encounters are peeling paint and missing safety handrails.

My house didn’t pass the FHA appraisal. What now?

Don’t panic. Home inspection problems are more common than you may think — and they don’t have to sink your deal.

The FHA appraiser notes any issues that the seller needs to fix before the loan can close. They’ll also recommend specific repairs and estimate the cost of these remedies to bring the home into compliance with HUD’s minimum property standards.

The comments section of your appraisal report contains a “Statement of Insurability” based on the work needed to meet FHA standards.

Your home is either:

• Insurable (IN): property meets FHA financing requirements with no major repairs needed
• Insurable with escrow (IE): insurable with repairs totaling less than $10,000, or
• Uninsurable (UI): in need of repairs over $10,000, making it ineligible for FHA mortgage insurance

If it’s feasible, take care of minor fixes on your own. For more extensive and expensive issues, your buyer may consider a repair escrow to roll the cost of repairs into their mortgage.

With a 203(b) repair escrow, the buyer borrows enough money to purchase the home and complete the needed repairs (up to $10,000). The money for repairs is held in an escrow account until the buyer proves they have completed the repairs within 90 days of closing the loan (or longer if the lender allows). Once a follow-up inspection confirms repairs are complete, the lender releases the funds.

A repair escrow satisfies the lender, helps the buyer get into the home, and saves the seller the time and headache of completing repairs.

Sellers: Don’t be intimidated by FHA loan property requirements

An expert on single-family home sales, South Carolina real estate agent Topher Kauffman hopes sellers won’t be discouraged by FHA property guidelines. He’s noticed that recent market changes have made FHA loans more accessible:

“There are a lot less restrictions on the FHA and VA loans and appraisals because lenders understand they’re all competing for the home.”

In Kauffman’s experience, appraisers mostly look for glaring red flags — like problems with the roof or air conditioning that make a home unsafe or unlivable.

He also reminds sellers that most conventional loans require appraisals and home inspections, too. So if your home has a significant safety or structural issue, you’ll likely need to repair or compensate for the issue before you close your sale, regardless of how your buyer plans to pay for the property.

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