Sellers used to shudder at the thought of an FHA loan. They often knew that the FHA would make them make repairs to the home before the buyer could close on it. Fast forward to today and the FHA still has property requirements that each property must meet, but the seller isn’t required to cover the cost of those repairs. If you’ve avoided FHA loans for this very reason, you’ll want to keep reading to learn more.
The FHA Minimum Property Requirements
The FHA does have MPR or Minimum Property Requirements. The good news is that they aren’t nearly as strict as they were many years ago. Basically, the MPRs make sure that the home is safe, sound, and sanitary. The FHA doesn’t want you to invest in a home that will be a money pit moving forward. In reality, the MPRs are everything you would probably want out of a home too including:
- Proper water drainage on the exterior of the home
- Easy access to the home from the street
- The roof should have at least 3 years left on it
- The water supply must be clean and adequate
- All utilities must be properly working
- There must not be any mold or mildew in the house
- There must not be any pest damage
- There must not be any lead-based paint in the home
These are the basics of what the FHA requires. They want a home that you can move into and live in safety from the start.
What if There are Issues?
Now, what happens if the appraiser does the appraisal and finds issues with the home that violate the MPR? Technically, the buyer will come to the seller and ask him to fix them. Without the repairs, the FHA lender cannot close on the loan. The seller can absolutely agree to make the changes and everything then moves forward as normal. As soon as the seller has proof that the repairs are done, the appraiser can come back out and sign off on the property stating that it’s FHA approved. The seller can also disagree to make the changes. This leaves you, the buyer, in a situation. You have one of a few options:
- You can walk away from the sale
- You can negotiate the repairs with the seller, possibly meeting him halfway
- You can pay for the repairs yourself
We’ll discuss each of these options below.
Walking Away From the Sale
It’s not easy, but if a home isn’t safe or sanitary to live, your best bet may be to walk away from it. This is best done when you have a contingency in the contract that protects you. For example, if you have a financing contingency on it, you can back out of the contract because your FHA loan won’t go through due to the appraisal issues. Obviously, if you have an appraisal contingency, you can back out based on the status of the appraisal as well. This will allow you to walk away from the sale with your earnest money in hand. If you don’t have a contingency in place, though, be careful. If you walk away from the sale, the seller may have the right to keep your earnest money. Some sellers won’t because of the ethics of the situation, but some might and may have the right to do so.
Negotiate the Costs
Sometimes a seller may be willing to split the cost of the repairs. It often depends on the depth of the repairs and the cause. For example, if it was something due to a storm or other natural causes, a seller may not want to put money towards the issue since it wasn’t due to neglect on his part. But, he may be willing to split the cost with you. Other sellers may not want to have anything to do with dealing with the repairs and would rather give you a credit for the cost of them. This often requires the lender to set up an escrow account where the money for the repairs will sit. The buyer can then manage the logistics of getting the work done. This will only work if the repairs are minor and don’t affect the FHA appraiser’s ability to approve the home, though.
Paying for the Repairs Yourself
The final option is to agree to pay for the repairs yourself. You should exercise caution with this option, though. If the repairs are bad enough that the lender requires them to be done before you close on the loan, you are putting up your own money before you own the home. If something falls through in the end, you are out the money you put into the repairs. If you do pay for the repairs yourself, be prepared for the lender to have to confirm that you have the funds to do so. Just like the lender has to verify your funds for a down payment or closing costs, they will need to make sure that you have the financial ability to manage the repairs if they are something that affects the home’s ability to pass the FHA appraisal. In the end, the seller should be responsible for any FHA repairs, but many don’t want that responsibility. You’ll have to gauge the situation to see if it’s worth it to push for the seller to pay for the repairs or if you should pay them yourself. Talk about it with your lender and weigh the pros and cons as they pertain to you to determine what is right.