Eric Heinrich of Mortgage Master recently sent this article to me, I think it could be helpful to many people thinking of buying or selling thier properties. If you are thinking of getting an FHA loan, it is important that you know this information. Here is the article:
With FHA loans becoming more and more common, and the warmer spring weather and recent rains, I thought it would be appropriate to provide some helpful information on FHA property condition issues.
HUD has minimum property condition standards that must be met before closing. They are primarily to do with health or safety issues from HUD’s standpoint
(i.e. Avocado Green or Harvest Gold appliances and shag rugs are acceptable to HUD, even if they might not be acceptable to anyone but Aunt Mabel.)(same for knob and tube wiring and houses running on fuses – if the utilities are functional – HUD is probably going to be okay with it)
Also – peeling paint – this is by far the most common one – peeling paint has to be fixed before closing, defined as scraped and bare wood primed, and scrapings cleaned up.
This becomes an issue when you have a seller that has priced a house to sell considering the peeling paint, the buyer has agreed to buy the house for an amount considering the peeling paint, and then the underwriter gets the loan and sees the pictures or reads the appraisers comments, and then requires the house be painted. (The only problems are, the seller doesn’t want to paint the house because they priced it accordingly, the buyers don’t want to paint the house because the paid accordingly, not to mention that the seller generally doesn’t want to have someone else working on their house, nor do the buyers get excited about painting a house they don’t own yet……ugghh.)
As long as everyone is prepared up front and realizes – hey - this is an FHA loan the paint is going to have to be dealt with – better to know beforehand than have it blow up. (maybe an agreement for a higher price and the paint be corrected before closing can be worked out between the parties? )
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This was asked of me today:
” The one question we had would be, would water damage automatically disqualify us from buying it via FHA Loan? Is there a list of what fails an FHA loan that you know of? Any info would be extremely helpful.”
The short answer about water damage: It depends on the damage and cause. Old stains, but the source has been fixed – shouldn’t be an issue. Current leakage/new stains – could be an issue. It depends on what the appraiser says and writes.
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Ok now the longer typical Eric explanation and answers:
It depends on what the appraiser comments on, but generally the things to be aware of:
Other than septic – that’s Mass law, the septic has to pass. If not, it has to be repaired. (Escrow holdbacks for Title V, or for required sewer hookup can still be done, but they are reviewed on a case by case basis – on an exception basis, and exceptions are not necessarily easy. Check up front!)
FHA specific stuff…
- Peeling paint – will need to be scraped and primed before closing. Period.
(Escrow holdbacks for paint can be done on a case by case basis, but I would consider than an ISOLATED exception and only due to weather related issues (can’t paint below 50 degrees)(with spring pretty much here, expect that escrow holdbacks will no longer be approved for paint issues)
- Termite damage – even if 20 years old and inactive, if the appraiser notices it and comments on it, it will need to be treated and repaired before closing. Even if it was treated 20 years ago.
- Broken windows – need to be fixed before closing. (You can still get window panes replaced at Home Depot)(don’t forget to paint the glazing!)
- Missing railings – need to be replaced. (a couple 2X4’s up real quick can meet this )
- Roof – if the appraiser comments specifically that the roof needs repair, or has less than 2 years life left, it will need to be fixed before closing
- Utilities – heat water and electricity must be functional. Old systems are ok, as long as they work.
- Water damage – this is subjective, again based on the appraisers comment. Water stains themselves are not a deal killer, if they are older and from an isolated incident, or the leak that caused the stains has been corrected. Current water stains (usually from missing flashing) – could be an issue. It depends on what the appraiser says. (The big concern is that it could be/lead to a health or safety issue)
- Any mold or mildew like substances that the appraiser notices they will have to comment on, (this is the same for conventional FHA or VA loans). If that’s the case, expect a required mold inspection and remediation.
If any of the above exist, and the appraiser doesn’t specifically mention them as strictly cosmetic, and they show up in the photos, the underwriter can require the visible issues to be addressed.
If the above issues cannot be corrected before closing, a 203(k) rehab loan can be used instead of a regular FHA loan. (Plan for extra time for these. Lots of extra time. Fair warning!)
One of my very first loans that I ever wrote back in 1996 was an FHA loan on a house in February that had peeling paint, and minor termite damage, (trial by fire!) and I’ve been doing FHA loans ever since. They are perfectly good loans, as long as a few extra questions are asked up front so we know how to keep things running smoothly.
If I can assist in any way, please let me know.
Eric Heinrich, CRMS
NAMB Certified Residential Mortgage Specialist
Mortgage Master, Inc.
(617) 648-3951 Phone and Fax
eric@heinrichmortgage.com
www.mortgagemasterinc.com
MA LENDER LIC#MC2151
MLO/NMLS#21434
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