FHA, USDA, VA appraisal rules
FHA loans and other government-backed loans (like USDA and VA) might require an appraisal and repairs before you can get approved.
Appraisal and repair priorities include:
- Health and safety issues
- Structural soundness
- Protecting your property value
The seller may have to complete repairs prior to closing, or you may be able to do them afterward with an escrow holdback.
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Appraisal repair requirements for government loans
The pros and cons of government loans
FHA, VA and USDA home loans are great options for eligible borrowers. They offer low rates and low down payment requirements. They make things easier for first-time buyers and folks with weaker credit. But the rules can be tricky.
For example, FHA appraisal requirements call for the home to be appraised and inspected by an FHA-approved appraiser. This person must follow stricter standards set by the government. As a result, the appraiser may flag several areas in need of repair.
That’s not a bad thing, because these items are primarily related to health and safety issues. For instance, if there is lead-based paint around, and you have toddlers, you don’t want them touching it.
Earth-to-wood contact is another item that these appraisers will flag because it means your home may be especially vulnerable to termite infestation. Who wouldn’t want to know that before purchasing a home?
However, some sellers will object to making these repairs before the sale can go through. You may have to renegotiate the deal or buy another house.
Know what to expect when pursuing an FHA, VA or USDA loan. Prepare to make repairs, if needed. Also, inquire about any loan matters you don’t understand. A government loan can still make for a great deal. But first, realize what’s involved.
Why government loans may require more repairs
An appraiser assessing a home to be funded via a conventional (non-government) loan has a fairly simple goal: determine the home’s value. Hence, they often use a standard appraisal form.
But a home to be backed by a government loan has to meet additional standards. For example, HUD must approve the appraiser for an FHA-funded home. Also, per FHA appraisal requirements, the appraiser has to perform two duties: appraise and inspect the property. And this appraiser uses a different form with tougher requirements.
“It’s not enough for the home to meet all local building code and health and safety standards,” says James Dodge, professor of law at Concord Law School at Purdue University Global. “It also has to meet specific standards, set by the FHA, VA or USDA, regarding its condition.”
Realtor and real estate attorney Bruce Ailion say the government has rigid rules for a reason.
“They’re intended to protect the lender’s interest in the property as collateral. It also protects the borrower’s interest in the property,” Ailion says. “FHA, VA and USDA want to make sure minimum property standards are met.”
Extra repairs may come up
Required improvements may include:
- Roof replacement or repair
- Lead-based paint removal in homes built prior to 1978
- Structural or foundation problems
- Major plumbing issues
- Electrical defects like exposed wiring
- Broken HVAC systems
- Rotting wood
- Faulty exterior doors
- Damp/wet basement or crawlspace
“The most common repairs for FHA loans involve the roof,” says Dodge. “FHA appraisal requirements mandate that a roof must keep moisture out and cannot have more than three roofing layers. Additionally, the attic must be inspected for roof problems.”
Another sticky wicket is old paint.
“If the home is over 40 years old, it may have lead-based paint,” Ailion says. “If that paint is chipping or peeling, that could lead to a costly repair. A professional remediation company needs to be hired.”
Dodge notes that the FHA, VA and USDA each have different standards. They also may use different appraisal and inspection forms for each loan type.
The bottom line: if the home doesn’t meet minimum government standards for safety, security and structural soundness, “it will have to be repaired or you won’t get the loan,” Dodge says.
Who handles the repairs
In the past, the seller needed to make and pay for these repairs before closing. But today, it can be either the buyer, seller or both. This depends on what’s specified in the purchase contract.
Typically, a purchase agreement with an inspection clause contains some form of contingency for repairs. For instance, the seller may be responsible for completing repairs up to a certain value — say $2,000. If the repair costs exceed this amount, one of three things can happen:
- The seller can agree t complete the repairs anyway
- Both parties may renegotiate the contract, splitting the costs or changing the sales price
- The buyer exercises his or her option to walk away
“Say the buyer has time before he or she needs to take possession of the property. In this case, asking the seller to resolve the repair problems is often the best approach,” suggests Dodge.
But if the buyer lacks the time or is unsure of the seller’s ability to make repairs quickly and to the government’s satisfaction. “Then, they might want to request an escrow holdback,” says Dodge. “This allows the buyer to make repairs themselves after closing.”
An escrow holdback means some of the seller’s proceeds won’t be released to the seller. Instead, the escrow officer pays the repair contractor from those funds as work is completed.
For FHA loans, the house the repair escrow limit is $35,000, and the repairs must be initiated within 90 days of the loan finalization and completed within one yearAilion notes that sellers often handle most of these repairs.
“But if the repair is a substantial improvement like a new roof or furnace, you may have to agree on a new purchase price,” he says.
If you’re responsible for repairs
First, if the repairs are extensive, consider changing your mortgage to an FHA 203(k) loan. This product allows you to finance the required repairs (and even some extra improvements if you want them), using the improved value to determine your loan amount. Your required down payment is still 3.5 percent of the value.
Footing the bill for needed improvements? Follow these tips:
Don’t rely on repair estimates made by the appraiser. “Get the inspection results and learn what repairs are needed. Then, get bids on repair costs from contractors experienced in making repairs that meet FHA, VA or USDA standards,” Dodge says.
Set aside extra money. “The exacting standards of these agencies can make for expensive repairs,” Dodge adds.
Try negotiating a price reduction with the seller.
Get extra help from the FHA. “Pursue renovation funds from the FHA’s 203K program,” says Ailion.
Get a separate property inspection. “Don’t just rely on the appraisal inspection,” Ailion says. “Too often uneducated borrowers rely on the appraiser’s report only to learn other things are wrong when they move in.”
FHA-required repairs may add extra complication to your home purchase, but they will also ensure that the home you buy is safe and habitable. And that’s never a bad thing.