Urban legends, mythology and the FHA loan

FHA loans have been an alternative loan for first time home buyers since the 1930’s. FHA stands for “Federal Housing Administration” Simply put an An FHA loan is a mortgage insured by the Federal Housing Administration.

The loans have advantages. Buyers only need a 3.5% down payment and there are other advantages. First time home buyers in particular should ask their lenders. The FHA loan might just be the best or only way to get the money to buy a house.

Buyers and sellers should not believe everything their real estate agent tells them about these loans. FHA appraisals are different than appraisals for other types of loans.

When a home buyer is getting a loan to buy a property the lender they are getting the loan from has to send out an appraiser to make sure the property is worth as much as the buyer is borrowing. The home becomes collateral for the loan.

The FHA appraiser determines the value of the property and also inspects it to make sure the it meets ” HUD’s minimum standards for health and safety” That kind of appraisal isn’t done for conventional loans. VA (veterans administration) loans also require a safety inspection as part of the appraisal process.

The FHA inspection is where much of the mythology comes from that surrounds these loans. I have had real estate agents tell me that all sorts of things will not pass an FHA inspection . . yet they do. If something does not pass an FHA inspection often a repair can be made so that it will pass. As a result home buyers sometimes do not make offers on houses they really want to buy, and sellers say no to FHA financing miss out on having the largest possible pool of qualified buyers.

FHA is not particularly picky about windows or the age of a boiler. They are picky about peeling paint that may contain lead and they will ask that a handrail be places along stairways. Leaky roofs won’t pass and neither will heating plants that don’t safely heat the house. Bedrooms must have egress windows and windows must open and close. While it is expensive to add egress windows it isn’t that big of a deal to repair a window so that it opens and closes.

HUD’s primary concern is the health and safety of the home buyer who will actually live in the house. Thus, most of their appraisal / inspection checkpoints have to do with health and safety aspects of the property. Above all, the home must be habitable and comfortable, without any potential hazards to the occupant.

HUD standards have changed over time but many real estate agents have not kept up. It doesn’t hurt to ask your lender or  read the guidelines. As a home owners myself I want my home to meet minimum safety requirements and would be inclined to make repairs for a new owner. After all we bought the house using an low downpayment FHA loan ad a forgivable silent second mortgage that helped with the closing costs.

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