FHA, USDA, and VA Appraisal Rules
Government-backed loans like FHA, VA, and USDA will likely require an appraisal and possible repairs before your mortgage loan will be approved.
The priorities for the appraisal and repairs are:
- Structural soundness
- Health and safety issues
- Protecting your property value
The seller can be required to correct the potential issues before you close. The seller can also potentially do repairs afterward with an escrow holdback.
Government Loans and Their Appraisal Repair Requirements
What are the pros and cons of government-backed loans?
For eligible borrowers, FHA, USDA, and VA home loans are great options. These types of loans can offer buyers low down payments and low rates. For first-time buyers and those who do not have perfect credit, these loans make it easier to buy a house. The rules for these loans can be tricky to navigate.
The appraisal requirements for FHA insist that the home is inspected and appraised by an appraiser who is approved by the FHA. They will also be required to adhere to stricter standards that the government places. Because of this, the appraiser can potentially flag numerous things that are needing repairs.
Believe it or not, this is a good thing because the issues tend to be safety and health issues. Let’s say you have small children and the home has lead-based paint, you would not want your children to be around that.
Another thing appraisers can flag is any earth-to-wood contact. This means your house is more prone to termites and that is something you really would like to know before you purchase the house.
Some repairs can be costly, and a seller may object to tending to the repairs before the sale can be finalized. If this happens, you might have to renegotiate the deal or even look at another house.
You need to know what to expect when you are considering a VA, USDA, or FHA loan. You should also be prepared to make any repairs if needed. You should always thoroughly look into all of your loan possibilities before you make your final purchase. Government loan programs can be great for some people, but you should know what’s involved.
Government Loans Can Require More Repairs
When dealing with a conventional (non-government) loan, an appraiser has one simple goal: to determine the home’s value. Typically, when dealing with conventional loans, appraisers will use a standard appraisal form.
On the other hand, a home backed by the government has additional standards that must be met. One standard is that HUD needs to approve the appraiser for an FHA-funded home. With an FHA loan, an appraiser has two jobs: inspect and appraise the property. An FHA appraisal will use a different form that has tougher requirements.
According to James Dodge, professor of law at Concord Law School at Purdue University Global, a home has to go even further than just meeting all of the local code, safety, and health standards. There are also specific requirements that are set by the VA, FHA, and USDA that a property’s condition needs to meet.
Bruce Ailion, a realtor and real estate attorney says the government enforces these strict rules for an important reason.
The reason the government enforces these rules is to protect the lender’s interest in the property that they will use as collateral. This will also allow the borrower’s interests in the property to be protected. The USDA, VA, and FHA want to be certain that a home they will be financing will meet the standards set in place.
Additional Repairs Can Happen
Some additional repairs that can happen are:
- Rotting wood
- Faulty outside doors
- Wet/damp basement or crawlspace
- Broken HVAC systems
- Electrical defects
- Plumping issues
- Foundation or structural issues
- If built before 1978, there is a risk of lead-based paint removal
- Roof repair and replacement
According to Dodge, the most common repairs for FHA loans deal with the roof. The appraisal requirements for FHA loans regulate that roofs are kept moisture-free and can’t have more than three roofing layers. The attic also needs to be inspected for any sign of roofing problems.
Another common issue can be old paint that contains lead
According to Ailion, if a home is older than 40 years old, it may have lead-based paint. It can be costly to deal with paint the is chipping or peeling, and it is something that will require a professional remediation company to repair.
Because VA, FHA, and USDA appraisals all have different requirements, they use different inspection and appraisal forms for each loan type.
This means is if a home does not meet the government’s minimum standards for safety, security, and structural soundness, the issues will have to be fixed or you won’t be able to get the loan.
Who Is Responsible for Repairs?
It was a thing of the past that the responsibility of repairs fell upon the seller. In today’s market, both parties can be responsible, the seller or buyer. It all comes down to what the purchase contract says about who is responsible.
A purchase agreement that has an inspection clause can list some form of contingency for repairs. It’s common for the seller to be listed as the responsible party for repairs up to a certain amount, let’s say $5,000. If the repairs are more than that a few things can happen:
- The buyer can decide to walk.
- The seller can agree to do all the repairs.
- Both parties can renegotiate the contract and either split the repair costs or change the sale price.
It would be beneficial to a buyer who is not in a rush to possess the property to ask the seller to fix the problems.
If the buyer is in a rush or is uncertain of the seller’s ability to make the repairs quickly and up to standards, they can request an escrow holdback. An escrow holdback will let the buyer make the repairs themselves after closing.
With an escrow holdback, some of the seller’s proceeds won’t be released to the seller. An escrow officer will pay a contractor for the repairs from the funds as the work is completed.
The repair escrow limit is $35,000 for FHA loans. These repairs are also required to be started within 90 days of the loan being finalized and they must be completed within one year. The sellers usually deal with most of these types of repairs.
You may have to agree on a new purchase price if the repair is something major, like a new furnace or roof.
What if You Are the One Responsible for Repairs?
You might want to look into changing your loan to an FHA 203(k) loan if your repairs are extensive. It will allow you to finance the repair costs (and even additional amounts), using the improved value to find your loan amount. You will still have a 3.5% down payment for your loan.
Repair estimates that are made by the appraiser are not always the finalized amount. It’s best to first get the inspection results to learn what repairs need to be fixed. Then shop around for some bids, in order to find the best rate on repair costs. You will also want to make sure the contractor is experienced in repairs that are up to VA, USDA, and FHA standards.
You will need to make sure you set aside extra funds. You can also try to negotiate a new price reduction with the seller if the repair costs are too much.
If you need to, look into renovation funds from the FHA’s 203(k) program for extra help.
You are also allowed to get a separate inspection of the property. There could be issues that the first inspector did not catch, and you don’t want to find out, after you move in, what else is wrong with your home.
FHA-required repairs can add more headaches to your purchase, but they will also protect you from buying a house that is not habitable and safe for you and your family.