Many people are getting into the housing market now that things have settled down a bit. One of the most popular ways to get funding for a home is by using an FHA loan or a loan backed by the Federal Housing Administration. While these loans are great for homebuyers, they do come with some significant stipulations. Some of these stipulations center around the inspection and appraisal process, and without knowing what to expect, you may be faced with a failed inspection. A failed inspection means no loan.
The top issues that are responsible for a home failing the FHA loan qualification inspection are roofing quality and condition, the overall quality of the structure, the condition of the heating, water, and electrical systems, and in some cases, the location of the home.
This may come as a surprise to many, but even though FHA loans may seem relatively easy to get, they can be difficult to get fully approved on many properties. The home must be in demonstrably good, not just habitable, condition. Additionally, it will need to stand up to the appraisal process since it will be the security against which the funds are loaned. There's more to consider, so let's take a closer look at just what the FHA inspection and approval process is and what might cause it to fail.
FHA loans are loans that aren't issued but are backed by the Federal Housing Administration. This administration is a division of the federal Department of Housing and Urban Development. Since they are backed by the FHA, the loans are already insured, and your lender will be protected from loss in the event of default.
FHA loans are one of the most attractive loan types for first-time homebuyers since they are available to most potential buyers, even those with relatively low credit scores or credit damage. Another reason that they are frequently sought by first-time homebuyers is that they can be obtained with comparatively lower down payments than other loan types.
However, even though they are popular for first-time buyers, you do not have to be one in order to apply or qualify for the loan. They are also popular with potential buyers who have had a foreclosure or bankruptcy in their recent credit history. Additionally, while closing costs can often require thousands in cash at the closing table, with FHA loans, those costs can be included in the final loan amount.
FHA Home Appraisals
Like most other mortgage lenders, an FHA loan will require an appraisal to ensure the valuation of the home. However, when applying for an FHA loan, this appraisal will have a dual function. Not only will it establish the fair market value of the property, but it will also function as a formal inspection to ensure the property meets the minimum standards required for servicing FHA loans.
The appraisal will be an official, written valuation of the property prior to the formal mortgage approval. During this process, the FHA-approved appraiser will determine:
- If the property has the market value to function as security for the loaned funds.
- If the physical condition of the property will require any significant repairs in order to be habitable.
- If the property has any potentially disqualifying hazards or other defects.
- If the potential longevity of the property aligns with the term of the mortgage being applied for so that the home does not exceed its expected lifespan before the mortgage is expected to be paid off.
In order to qualify for an FHA loan, there are some conditions that the borrower must meet. These requirements include:
- Any home being considered for purchase must be appraised by an appraiser approved for FHA home inspection.
- An FHA loan can only be obtained for a property that will serve as the borrower's primary residence, which means many investment properties cannot be obtained with an FHA loan. The exception to this is multi-unit buildings, where the borrower will be residing in one of the units and renting out the others. They cannot be used by a borrower to obtain a second home.
- The property must become occupied by the borrower within 60 days of closing on the property.
- An inspection must occur, and the inspector must officially report if the property meets the FHA minimum standards.
Additional requirements may apply in your situation, such as mandatory down payment amount, being able to obtain mortgage insurance, and meeting the personal financial requirements for loan serviceability.
Top 6 Issues That Won't Pass FHA Inspection
The roof of the property will need to be robust and sturdy enough to keep out moisture. It will need to be structurally sound enough to not need repairs or replacement for at least two to three years from the appraisal. Additionally, the roof may not have more than three layers, and if it does and those layers have sufficient damage, the appraiser would require a new roof to pass inspection.
Overall Structure Quality
The structure must meet minimum safety and structural requirements to keep the occupants safe. This means that any indication of foundational or structural defects such as termites, leaks, excess moisture, rot or decay, or other structural damage may cause an inspection failure. If the borrower wants to move forward with the property and the FHA loan, they will need to arrange for sufficient repairs.
Heating, Water, & Electrical Systems
The property must be able to provide heat to all habitable rooms, although areas that experience mild winters may be able to receive exceptions to this point. The water heater must be installed, and functional according to the local building codes, and the electrical system must be in good repair and without damaged or exposed wiring. The plumbing system must also meet necessary building and plumbing codes and standards, such as modern pipes and safety measures.
Many people don't realize it, but the location of the home may disqualify it from FHA approval. This can occur if the home is too close to a noisy or dangerous area. Homes near waste sites may be excluded for this reason. Other causes for denial may be very high traffic levels, close proximity to an airport, electrical grid equipment, or a TV tower. Homes close to any potential risk of explosions, such as gas or oil pipelines, may be excluded, as can homes too close to sources of high noise levels.
Another condition for FHA loan approval is that the property must be able to accommodate access by both pedestrians and vehicles. This primarily includes emergency services, such as fire or paramedics. These access requirements apply year-round and under all weather conditions.
General Safety Hazards
There are multiple other potential hazards that may cause the property to be denied an FHA loan approval. These include, but are not limited to:
- The property must have a functional septic or sewer system
- The property must be free of any significant soil contamination
- There may not be any underground storage tanks located on the property
- The property that the home is on must exhibit good drainage, and the direction of drainage must be away from the walls of the home.
- The water supply to the property must be safe and sufficient
- There cannot be any evidence of termite infestation
- The attic or crawlspaces of the property must show evidence of sufficient ventilation
- There may not be any presence of lead-based paint.
How Long Are FHA Appraisals Good For
Once a home has its FHA appraisal. That appraisal will be valid for 120 days, with the potential for an additional 30-day extension for buyers who meet eligibility requirements. The appraisal process itself will often take a similar amount of time as an appraisal for a conventional mortgage. While the timeframes may vary depending on the buyer and seller interactions, the general process will resemble the following:
- The buyer and seller negotiate and sign a sales contract.
- The buyer then submits the signed contract to their FHA-approved lender.
- The lender will then order an appraisal from an FHA-approved appraiser.
- The appraiser will research the property and market and will perform the on-site appraisal.
- Following the appraisal, the appraiser will submit their report to the lender for final approval.
Understanding Why Homes Fail FHA Inspections Can Help You Shop More Effectively For Your Home
When you apply for your FHA loan, and they send out a HUD-approved appraiser, they're going to go down the FHA inspection checklist, and if your potential home fails any of the items on that list, there's a good chance that you will be denied the loan.
Knowing what to look for ahead of time can not only save you a lot of time but incredible amounts of frustration and even heartbreak when you think you've found "the one." Be sure you go down that FHA checklist before the inspector and appraiser come out, and you'll stand a much better chance of approval.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.