What to Know About Inspection and Appraisal Requirements With FHA Loans
Are you wondering about the FHA inspection requirements? Maybe you are interested in the FHA appraisal guidelines?
By following this FHA selling guide, you will put yourself in a position to sell your house to a buyer using an FHA mortgage.
When selling a home, it is critical to understand how to make your house eligible for buyers wishing to use an FHA loan.
An FHA, or Federal Housing Administration mortgage, is a popular loan with first-time home buyers.
It allows those with solid credit to buy homes with a small down payment, as low as 3.5%, so it is understandable why many home buyers choose the FHA option.
With around 30% of home buyers using FHA loans, there is a good chance you will get an offer from an FHA buyer for your home.
If you want to accept that offer, you will need to have a home that meets the requirements of the FHA – which can be stringent and has derailed more than a few home sales that looked like an otherwise perfect fit.
In other words, you should want to know how to make your house FHA mortgage compliant!
Not every home qualifies for an FHA mortgage, so it’s essential to understand the regulations. What seller wants to accept an offer from a buyer using FHA financing only to discover a significant roadblock in the middle of the transaction?
Fat chance there aren’t any who want that!
You want your real estate agent to know how FHA financing works. There is no point in accepting an offer from a buyer with an FHA mortgage if the home isn’t going to qualify.
Here are some of the problems sellers encounter with FHA loans. Do your best to avoid these issues.
Keep reading, and you’ll see how to make your home eligible for an FHA mortgage before it becomes problematic.
What is an FHA Inspection and Appraisal?
With a standard home purchase, a mortgage lender will require a home appraisal to be completed to ensure there is adequate equity in the property.
When a potential buyer uses an FHA loan, the U.S. Department of Housing and Urban Development (HUD) requires an appraisal and inspection of the home’s condition.
The property must meet minimum safety and security standards to pass FHA inspection requirements.
Under FHA appraisal guidelines, the inspection will be done by a HUD-approved FHA appraiser. The property must be in reasonably good condition to pass the FHA inspection requirements.
There cannot be severe defects that could hamper safe and healthy living conditions. N structural defects in the home can be present.
The FHA appraiser will determine whether the property meets the standards set forth by the FHA. They will take note of the property’s condition, noting any red flags on an FHA-approved form.
The FHA appraiser will use the standard Uniform Residential Appraisal report with single-family homes.
The inspector will list the appraisal problems that must be corrected before FHA can grant the loan.
An FHA Appraiser Will Provide The Value in Addition to The Condition
The appraiser will also provide a real estate appraisal like they would with any other home. They will use the best real estate comps compared to the subject property.
After analyzing all the comparable sales data, they will provide the lender will an appraised value. The FHA appraisal timeline is similar to any other type of loan.
An FHA appraisal is good for 120 days. It is also possible to get a 30-day extension.
FHA Selling Guide to an FHA-Approved Buyer
While the FHA can be strict about its home requirements, the organization is relatively reasonable in what it expects. If you plan to sell a property, you can most likely meet the criteria with a little effort and investment.
A few exceptions, like a leaking roof or a non-function heating system, would be large expenditures.
Ultimately the work will be worth it – giving you access to 30% of the home buyers in today’s market.
Here are some things to consider if you want to sell to FHA buyers:
What Won’t Pass an FHA Inspection?
It makes sense to fix serious problems first to ensure you pass the FHA inspection requirements. The FHA has appraisal guidelines that appraisers must follow when inspecting homes.
The FHA will not approve a mortgage for a home with severe defects.
If you sell to an FHA buyer, you must fix significant issues like a leaking roof, structural issues, lead paint, mold infestations, and other significant problems.
Items like these are FHA appraisal red flags that the FHA appraiser will call out in their report.
Fixing substantial issues before listing for sale is necessary if you want to get the best price for your home – from an FHA buyer or any other buyer – so you might as well invest if you are interested in attracting the best buyers.
An FHA Appraiser Will Likely Flag These Problems
Here is a list of common issues that an appraiser could flag when the buyer is using FHA financing.
You can use this as your FHA appraisal checklist for items that should be corrected.
- Peeling paint in homes that were built before 1978.
- Safety issues like a missing handrail on a deck or stairway.
- Falling or unattached gutters.
- Exterior doors that don’t open and close correctly.
- Exposed wiring and uncovered junction boxes.
- Non-functional heating systems.
- Significant plumbing issues.
- No active pest issues. This may require an inspection.
- Leaky or defective roofs, roofs with a life expectancy of fewer than three years.
- Rotted window sills and wood trim.
- When missing appliances are always sold with a home such as a stove.
- Kitchen appliances that do not function.
- Having bedrooms without windows for proper egress by a human.
- Foundation or structural defects.
- Having an actively leaking basement.
- Evidence of standing water in a crawl space.
- Empty swimming pools or pools that don’t have a working pump.
- Ripped or badly damaged screens.
- A fence in disrepair.
From a seller’s perspective, making these repairs before selling your house is always intelligent. Not only will you make more money, but you’ll also likely sell your home a lot quicker.
It would be best to address these things to make your home eligible for an FHA mortgage.
FHA Appraisal Subject to Repairs
When an FHA appraiser flags deficiencies and reports them to the lender, they must be remedied. The lender will only approve the mortgage with “subject to repairs” being completed.
Once the repairs have been completed, the appraiser will revisit the property to ensure the work has been finished. It is called an FHA appraisal re-inspection.
Loan Limits Could Prevent Your Home Being Eligible For an FHA Loan
The FHA sets loan limits based on home prices in different markets. If your home will be priced above the loan limit, it is probably not worth your time to prep the property for FHA buyers.
They will not look at your property unless they meet the difference between the maximum loan and the selling price.
The FHA limits vary considerably by area. Be sure to check what the limits are in your market before you take further steps to appeal to FHA buyers.
The FHA recalculates its national loan limit yearly. These limits are based on a percentage calculation of the federal conforming loan limit.
For 2023, in expensive areas, the FHA national loan limit “ceiling” will increase to $1,089,300. FHA will also increase its “floor” to $472,300.
Also, the maximum claim amount for FHA-insured Home Equity Conversion Mortgages (HECMs), or reverse mortgages, will increase to $1,089,300 as well.
You can see the FHA loan limits for Massachusetts in this excellent reference. Use Google, and you can also get this information for your state.
Do you know how often I have heard stories where a real estate agent had no idea about FHA loan limits? The answer is far too many! Having a seller accept an offer with an FHA mortgage over the loan limit wastes everyone’s time.
It’s called gross negligence.
Informing FHA Buyers About Home Inspections
Inspections for homes are a standard part of the sales process. The home inspector looks for any problems with the house and submits a report with their findings.
Most home buyers will want an inspection. However, many buyers are not aware of the fact that a home inspection is different from an appraisal.
When working with FHA buyers, you must provide a document explaining the difference between a home inspection and an appraisal.
Another essential thing to remember is that if you decide not to make your home FHA compliant and are selling as is, the buyer should be informed you will not be participating in making any repairs needed to the property.
An FHA Approved Appraiser is Required for the Sale
As mentioned, the FHA will only approve a mortgage if an appraiser approved by the FHA appraises the home. No matter how good another appraisal is, the FHA-endorsed appraisal will be used to make the final loan decision.
One crucial thing to note is that an FHA appraisal stays with a home for 120 days. Why is this important? Suppose someone buys your home for $300,000, and the appraisal comes in at $290,000. There is an appraisal gap.
The appraisal for $290,000 will remain with your house for four months. You would need to dispute the low appraisal; otherwise, any buyer coming forward in that four-month window is stuck with the appraised value.
While appraisers are supposed to be impartial, making their job more manageable when you are trying to sell never hurts.
You can do your best to provide easy access to all areas of the home, including the basement and attic, because the appraiser will have to do a full survey of the property to complete their appraisal.
You Can Help With Closing Costs For an FHA Loan
Closing costs can be a big hurdle for FHA buyers, so the FHA allows sellers to assist with some of the costs.
The FHA will enable sellers to help with up to 6 percent of the home’s sales price to help with closing costs, interest rate buy-downs, or discount points.
Of course, you are not obligated to help with closing costs. But helpful be beneficial to close a deal with an FHA buyer.
Remember, when evaluating an offer on your home, your bottom line matters and nothing else.
Here is an example of what I mean:
- Buyer #1 offers you $300,000.
- Buyer #2 offers you $309,000 but asks you to pay $9000 in closing costs.
These two offers are identical. In each case, you get the same amount of money.
Over the years, I have seen some sellers lose their minds because buyers ask sellers to pay part of their closing costs or offer a seller concession.
What’s important is your net. Don’t get caught up in the buyer asking for a closing cost credit. Who cares what the buyer asks you to do if you meet your objectives? Keep this in mind.
Your goal should be to get to the closing table with a reliable buyer.
Ensure You Understand FHA Condo Rules
FHA loans for condos carry special rules you should be aware of if you sell a condo. Your condo must be approved for FHA-approved mortgages. The list is regularly updated, so you will want to check that your condo is approved before you try to get an FHA buyer.
Why is this important? As mentioned, many buyers get FHA mortgages because of the loan down payment. If the condo development in which you live is not FHA-approved, you stand to lose many buyers.
The best way to determine if your condo will be approved for an FHA loan is to check the FHA-approved list and talk with your condominium association about eligibility. The association should have information on late membership dues, the percentage of FHA-insured units, and more pertinent information.
As of 2022, getting “spot approval” for a unit is now possible, but you must still follow FHA guidelines.
FHA Condo approvals Rules to Know
The FHA usually will not approve a condo mortgage if more than 15% of owners are late on their association dues. It will also usually not approve a mortgage for a condo where the FHA insures 50% or more of the units.
If you find out that you do not meet all of the requirements for an FHA mortgage, you may be able to get a waiver. Sometimes your real estate agent can talk with local lenders and get a release.
While it is not guaranteed, it is worth trying if you want to sell to an FHA buyer. It’s always crucial to do your due diligence when buying a condo. These tips will help.
Another Alternative – The FHA 203K Loan
Another option for home buyers when purchasing a property that needs work is a 203K FHA mortgage.
The 203K allows a purchaser to roll into the loan-specific improvements that need to be made.
For example, all items below can be moved into the loan.
- Structural improvements to the home.
- Modernization and upgrades to the home’s function.
- Resolving any existing health and safety hazards.
- Alterations that improve appearance.
- Replacement of plumbing, installing a septic system or a well.
- Replacement of roofing, gutters, and downspouts.
- Replacing or adding floors.
- Significant site improvements or landscaping.
- Making the home accessible for a disabled person.
- Making energy additions or improvements.
The cost of the work with a 203K loan must be at least $5000. The 203K mortgage covers the purchase cost plus the work you will do for the property.
Work With A RealEstate Agent That Understands FHA Loans
One of the easiest ways to ensure you are ready for FHA buyers is to work with a real estate agent who knows the FHA process. An experienced agent will know all the rules and limitations and can quickly determine if your home is eligible.
If you need to take steps to prepare for FHA buyers, your agent can guide you through them to minimize your costs and maximize the desirability of your property. And with the right agent, you will attract more than just FHA buyers!
Hopefully, you understand how to qualify your home for an FHA mortgage. Use this as your FHA selling guide!
Final Thoughts on FHA Inspection Requirements
FHA loans make up many mortgages buyers use to finance their purchases. It behooves sellers to ensure their properties meet the current guidelines.
Additional Helpful Mortgage, Buying, and Selling Articles
- FHA guidelines home buyers should know – Luke Skar all the rules and regulations when using FHA financing.
- Mortgage terms all buyers should understand – Paul Sian defines many mortgage terms buyers can expect to encounter.
- Pricing so you don’t leave money on the table – Ellen Pitts provides helpful advice on pricing your home accurately.
Use these additional articles to make intelligent decisions when buying or selling a home.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate information on the FHA inspection and appraisal requirements. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ Years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
