With a FHA loan a frustrating issue that can arise is the requirement to perform repairs and/or inspections in connection with the appraisal. In certain situations the appraisal can be conditioned on certain repairs being made or an inspection being performed to ensure the area of concern does not present a hazard that prevents the property from meeting FHA requirements. The appraisal cannot be finalized and the loan cannot be approved until these issues are resolved. When a repair or inspection requirement becomes a condition to the appraisal it is often late in the process and can be a deal killer. With a good understanding of what FHA requires and what appraisers are looking for, the issues can be dealt with prior to becoming a problem or they can be avoided altogether.
FHA requires that properties on which it guarantees a mortgage must not have any known hazards or conditions that:
- Affect the health and safety of the occupants;
- Affect the structural soundness of the improvements; or
- Impair the customary use and enjoyment of the property.
The appraiser is tasked with making a determination regarding whether the property being appraised meets the above guidelines. Most appraisers are not licensed inspectors and may have limited knowledge of the systems that are present in homes and lack the knowledge to make the determinations required by FHA. To some degree the determinations that an appraiser is required to make are subjective and will be based on their individual background and experience. If there is a concern about the condition of the house, often an appraiser will require an inspection be made by someone qualified to assess the condition. This is to ensure the system is functioning properly or that the area of concern is not a major issue.
If the following situations or conditions are present a property inspection will likely be required:
- Standing water against the foundation or excessively damp basements;
- Hazardous material on-site;
- Faulty or defective mechanical systems (electrical, plumbing or heating); or
- Evidence of structural failure (settlement or bulging foundation wall).
Following is a general list of the issues that will normally lead to a repair or inspection requirement on an appraisal for a FHA loan.
- Defective construction;
- Evidence of continuing settlement;
- Excessive dampness;
- Termites; or
- Other readily observable conditions that impair the safety, sanitation or structural soundness of the dwelling.
Often the seriousness of each of these items is in the eye of the beholder but often it is more a case of: You know there is a problem or there may be a problem when you see it. When in doubt the appraiser will typically require that the area of concern be inspected and certified by the appropriate contractor (i.e. roofing, plumbing, electrical etc…). Following is more specific guidance that FHA provides in connection with the following areas.
Lead Based Paint
For pre-1978 properties, all interior and exterior surfaces that have chipping, flaking or peeling must be corrected. This includes walls, stairs, decks, porches, railings, window, doors, fences, detached garages, storage sheds and other buildings. Peeling plaster and sheetrock must also be repaired.
Water and Sewage
The property must have hot water, a sufficient supply of water under adequate pressure and the appropriate quality of water for household uses. Water must be sanitary and there should be a safe method for sewage disposal (i.e. connection to public system or a well and septic system). Any well and septic systems must meet the legal requirements for the location. Unacceptable conditions relative to the water supply are mechanical chlorination and water flow that decreases substantially when simultaneously running water in several plumbing fixtures.
Foundation and Drainage
The property site must be graded to provide positive drainage away from the perimeter walls of the dwelling and to prevent standing water on the site. The appraiser is required to inspect for evidence of conditions that could indicate safety or structural deficiencies that may require repair.
The covering must prevent moisture from entering the property and it must provide reasonable future utility and durability. The roof must be visually observed to determine whether deficiencies represent a health and safety hazard and that the roof has a reasonable life. A visual inspection of an unobservable roof (i.e. due to snow or a flat roof) can be waived if there are no visible interior issues.
All mechanical systems must be safe to operate and must be protected from destructive elements. They also must have a reasonable life expectancy. Heat and electricity must be available in the property.
Attics and Crawl Spaces
All attics must have ventilation and allow moisture & excessive heat to escape. There must be adequate access to crawl spaces and the appraiser must be able to visually examine all areas of the crawl space. The crawl space should have proper ventilation and must not be excessively damp or have standing water.
Other health and safety deficiencies
The existence of these items will require repair:
- Broken windows;
- Inadequate or blocked doors and steps; or
- Electric garage door that fails to auto reverse.
Every property must have suitable space for living, sleeping, cooking, dining and bathrooms. All bedrooms must have adequate egress to the exterior of the property via a window.
FHA no longer requires an automatic inspection for termites or other wood destroying insects unless there is evidence of an active infestation, unless mandated by law or unless it is customary for the area. If there is evidence of termite infestation an inspection will be required.
Well and Septic Systems
Inspection of a well is not required unless mandated by federal or local law or unless there is evidence or knowledge of the water being contaminated. Similarly, an inspection of a septic system is not required unless there is evidence of a system failure. If there are known or suspected problems with either the well or septic system the appraiser will require an inspection to ensure they are functioning properly and meet the applicable legal requirements. Any deficiencies found during inspection must be corrected.
Lastly, deferred maintenance and normal wear and tear that does not affect the safety of the occupants or the security and soundness of the property is not required to be inspected or repaired. In the past FHA may have required inspection or repair of the following issues but no longer does in the absence of more serious concerns:
- Missing handrails;
- Cracked or damaged doors that are otherwise operable;
- Cracked window glass;
- Defective paint surfaces in post 1978 homes;
- Minor plumbing leaks;
- Defective floors;
- Rotten or worn out counter tops;
- Damaged plaster, sheetrock or other wall and ceiling materials in post-1978 homes;
- Poor workmanship;
- Trip hazards (such as cracked or heaving sidewalks or poorly installed carpets);
- Crawl space with debris and trash; and
- Lack of all-weather driveway surfaces
All references are from the HUD Handbook Sections 4150.2 and 4155.2, Appendix D and applicable HUD mortgagee letters.