What You Need to Know About Property Standards for US Government-Backed Mortgages
Home inspectors evaluate a property according to standards of practice dictated by our state, which is designed to ensure the information provided is useful, but reasonable, and within specific boundaries. These standards are there to protect the home inspector as much as they are the customer and apply no matter what type of financing is being used to purchase the home.
Homebuyers looking to finance a home purchase with Federal Housing Administration (FHA) or a Veterans Administration (VA) insured loan are sometimes surprised to find that they are not allowed to purchase a particular resale property because it doesn't meet FHA or VA lending requirements. These "other" requirements are called the FHA Minimum Property Standards (MPS) and VA Minimum Property Requirements (MPR).
FHA and VA created their requirements in order to protect their investment in the property as they are insuring the mortgage. As you know, when a homebuyer takes out a mortgage, the property serves as collateral for the loan. If the homeowner defaults on the loan and the lender are required to foreclose and take back the property, they will want a property with the fewest safety or soundness concerns possible. The resale of the home will, in most cases, be a loss to the lender and an insurance claim to FHA or the VA. While the mortgage company cannot ensure the property will remain in safe and sound condition, the lender has at least limited their risk.
Many of these minimum lending requirements overlap the state home inspection standards; however, they also include many items that are in the scope of responsibility for the appraiser and, as such, will not be identified or mentioned in home inspection reports. In other words, while it is impossible for a property to “fail” a home inspection, it can, and likely will, fail to secure financing if these minimum property standards are not met. Therefore the “as is” listing disclaimer is oft-times ineffective in negating the problems of a property requiring financing.
Some examples of potential financing “deal killers” could include:
Unsanitary conditions, e.g., insect or rodent infestations, sewage contamination or septic problems, standing water in a crawlspace or basement, mold, excessive trash, etc.
Safety concerns: exposed wiring, friable asbestos materials, lead paint, missing or broken stair railings or steps, overhanging or leaning trees, lack of adequate smoke or CO detectors, etc.
Structural or systems concerns, such as foundation cracks, termite or water damage, undersized electrical panels, antiquated systems (knob and tube wiring, lead or galvanized pipes, fuse panels, etc.), improper or unpermitted additions, missing HVAC or plumbing components, etc.
Deleterious features: excessive traffic, aircraft, or industrial noise, neighborhood blight, shared well or easements, unusual construction, or a house that is atypical of neighboring properties (e.g., a log cabin in a subdivision of contemporary homes).
What is the process of determining eligibility?
For a typical single-family home, the appraiser will complete a form called the Uniform Residential Appraisal Report. In this report, the appraiser will make his assessment of the type, size, and composition of the dwelling as well as the property. They will also evaluate the home to determine if the systems and components comply with the FHA or VA minimum property standards/requirements and will recommend repairs or corrections as they deem necessary. Something that is not common knowledge is the fact that the appraiser does NOT make the determination if a home is or is not eligible for the mortgage- it is the underwriter who independently makes this decision based on their interpretation of all available information.