A home must meet the FHA property requirements in order to secure a 3.5% down FHA loan. Here's what to look for.
FHA loans are among the most solid mortgages in the market. Low down payment, low credit score requirement, and relatively low interest rates. Plus, unlike some home loan programs, there’s no upper income limit on who can qualify.
To qualify for this low down payment loan, the house you buy must pass an FHA appraisal. And FHA property standards are a bit stricter than, say, conventional loan programs.
That doesn’t mean they’re impossible to meet. In fact, most homes will pass the FHA appraisal just fine. But it helps to understand the FHA property requirements so you can focus on properties that are likely to qualify.
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FHA minimum property standards
When you apply for an FHA loan, the lender will schedule an appraisal with an FHA-approved appraiser.
The appraiser performs a visual inspection of the exterior, the interior, and surrounding areas, as well as systems within the home, and makes a detailed report.
We break down some of the key FHA property requirements they’ll look out for.
The safety and livability standards include:
- Structural integrity, such as foundations, roofs, attics, and basements
- Availability of services such as heat, water, electricity, and sewage
- Adequate living space for cooking, eating, and sleeping, and daily activities
The appraiser will also be on the lookout for physical and structural hazards, such as:
- Inadequate or damaged foundations
- Defective construction
- Poor workmanship
- Settling of the property (some amount of settling is normal, but the appraiser will look for settling that has caused structural cracks or foundational issues)
- Excessive dampness
Roofs need to:
- Prevent moisture from entering the home
- Be reasonably durable and functional
Crawl spaces must be:
- Free of moisture and debris
- Show no sign of termites or other infestations
- Adequately ventilated to prevent heat and moisture
- Have adequate access to the crawl space
The property needs to be free of known hazards that affect health and safety, the home’s use, or may affect the structural soundness of the house and its marketability.
These include, but are not limited to:
- Toxic chemicals
- Radioactive materials
- Lead-based paint
- Hazardous activities
Lead-based paint is common in older houses that were built before the government prohibited its use in residential properties in 1978.
But older houses pass FHA appraisals all the time, even ones that likely have some lead paint.
The issue is whether the paint is in good condition or well-concealed. One of the big dangers with lead paint occurs when it’s chipping or flaking, as it becomes easier to ingest, particularly if you have small children who crawl or play on the floors or may come in contact with chipping paint on the exterior.
But if the paint has been concealed — often by other coats of non-lead based paint — the risk is significantly lowered.
You can have professional lead paint remediation done on a house, but the process is costly. Many people, renters and homeowners alike, opt instead to maintain the paint in their homes and conceal areas known to have lead paint.
The appraiser also looks at the property and land to assess soundness and suitability, on the lookout for the following.
- Inadequate surface drainage
- Flood risks
- Soil contamination
- High ground water levels
- Unstable soil
- Improper grading (when the slope of the land causes water to drain toward the house rather than away from it)
- Overflowing sewage disposal
- Storage tanks or evidence of hazardous underground storage
If the home has hazardous underground storage — for instance, an old oil tank that has not been sealed — it will likely need to be dealt with before you can buy the home. But that’s not exclusive to FHA loans.
Lenders may also refuse to approve conventional loans if a potential chemical or environmental hazard is present on the property. The seller (or buyer) may need to pay for a professional to do a proper “abandonment” and sealing of old tanks before the home can be sold.
The term “encroachment” in real estate means that a part of the structure is built on or hangs over land that is not owned or controlled by the homeowner. A neighbor or another entity, such as a local municipality, has authority over the adjacent land, which can cause problems for the homeowner later.
An appraiser will look for encroachments from the appraised home to another property and vice versa. That includes not only the primary dwelling, but any other structures on the property, such as a garage or shed.
Many properties also include a right-of-way or easement, which allows another person or entity access to the land. A common example is an easement to a utility company that permits it to access a pipe on or through a residential property for the public good.
Another type of encroachment can arise from a building or property encroaching on a “setback.” A setback is a building restriction, such as a regulation stating that no structure can be built within a specific distance from the property line.
Encroachments can complicate an FHA loan. If the appraiser finds an encroachment, the property could be ineligible for FHA mortgage insurance, which is mandatory on FHA loans.
Fortunately, exceptions abound. The FHA appraiser may approve a property with an easement or right-of-way if it was granted in perpetuity by a neighboring property holder or a local government. In that case, the lender will likely require documentation of the agreement from an official entity, such as the County Clerk and Recorder’s Office.
As part of the home appraisal process, the appraiser evaluates the suitability and conformity of the home to the neighborhood. The home must be suitable for the stated purpose: meaning a single-family home must be suitable for a single family to live in, and not be a commercial building that doesn’t accommodate residential needs.
Conformity to the neighborhood centers around marketability concerns. Remember that a key element of an appraisal is determining the home’s value. Part of a property’s value is tied to whether it fits in with the surrounding area.
A house that generally conforms to the neighborhood in size, design, and appearance will generally command and hold value in accordance with the neighborhood. That doesn’t mean that the size, design, and appearance has to exactly match other homes in the neighborhood.
But if every other house on the street is a Craftsman-style home built in the early 20th century, then a modern, shipping container build — while interesting and potentially eco-friendly — will raise some eyebrows and may not have good resale value.
The differences don’t even have to be that extreme. A home that is similar in style but significantly smaller than surrounding homes may not be desirable to potential buyers. Meanwhile, a home that is significantly larger than its neighbors may be outside the budget for most homebuyers looking in that area.
Generally speaking, a house that fits in with its surroundings will hold its value better than one that is too unique to appeal to a majority of homebuyers in that locale.
Termites can significantly damage the structure of any building made of or containing wood. Unfortunately, the damage can occur long before it’s discovered — which means it may be severe by the time an appraiser identifies it, and it can be costly to remediate.
FHA appraisers also look for signs of other pest infestations, including rodents and cockroaches. If the house shows signs of termites, a licensed termite inspector will need to inspect the home and rid it of infestation. Any damage will also need to be repaired.
Homebuyers can pay for in-depth pest inspections before they close on the home as well. A pest inspector will investigate the possibility of not just rodents, roaches, and termites, but wasps, carpenter ants, bedbugs and fleas, and other harmful (and rather gross) pests.
Related reading: FHA Loan Requirements [loan_year]| Rates & Eligibility
The appraiser’s report may list areas that must be fixed before the lender will approve the loan. At that point, you’ll need to negotiate with the seller on who will pay for and manage the required repairs.
Examples of what an appraiser might flag:
- Broken or significantly cracked plaster or sheetrock walls
- Peeling paint
- Wood floors whose finish has worn off
- Badly soiled carpets (if they affect livability or marketability)
Once you receive the appraisal report, you can decide whether it’s worth negotiating with the seller or whether you want to back out of the sale. Relatively minor repairs, such as fixing peeling paint, may not be a dealbreaker.
But if the appraisal turns up major structural issues that are both costly and time-consuming, you may decide it’s best to find another home. Fortunately, FHA loans include appraisal contingencies that allow you to walk away from the sale with no financial penalty if the appraisal comes in low or reveals property issues.
Related reading: Crash Course in FHA Appraisal Requirements
Buying an older house does not necessarily mean it’s less likely to pass the FHA appraisal. FHA guidelines don’t require appraisers to flag systems or structures based on age alone. So if the home is in good condition and systems are functioning, it could very well pass.
But if you’ve got your eye on a house that needs significant work — think broken steps and handrails, water damage, and torn-up floors — a standard FHA loan probably won’t work.
There is a solution, though. FHA 203k loans allow you to finance the home purchase and up to $35,000 in renovation costs in a single mortgage.
FHA loans are backed by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
These loans are designed to help low- to moderate-income folks on the path to homeownership. Borrowers with credit scores as low as 580 can qualify for FHA loans with just 3.5% down.
But because the government backs these mortgages, the FHA wants to make sure that borrowers are buying homes that are safe, livable, and will afford them good quality of life. They don’t want low-income borrowers ending up with properties that are unsafe or that they can’t afford to maintain.
Fair market value
Additionally, the FHA will not insure homes for more than their appraised values. So an FHA-approved appraiser not only inspects the property for safety and livability, they also determine the fair market value of the home. They look at a number of different factors to decide this number, including the property itself, the location, and the sale prices of comparable homes in the neighborhood.
Lenders require appraisals because they, and the FHA, need to verify the home’s safety and value. It’s in their interest to not lend more than the home is worth.
But it’s in your interest, too. As frustrating as it is to have an appraisal come in low, or to find out that a property needs repairs before you can close on your loan, you don’t want to pay more than the home is worth.
If you sell the home a few years down the road, you want to make at least enough on the sale to pay off the home. Otherwise, you’ll have to pay your lender the difference in cash or do a short sale – when you sell the home for less than you owe. That can hurt your credit.
Bottom line: Appraisals are required by lenders, but they’re good for you, too.
They can be. But lenders require appraisals for conventional loans as well. And if the appraisal comes up short, conventional borrowers face the same dilemma as FHA homebuyers — pay the difference in cash or walk away from the sale.
Appraisers for a conventional loan also determine the value of the property and look out for any livability or potentially hazardous issues. Most properties need to have the basics — running water, access to sewage services, heat and hot water, sufficient living space, no obvious safety hazards or infestations — in order to qualify for financing.
But only FHA-approved appraisers can conduct appraisals for FHA loans. Again, most homes will meet the FHA’s criteria. But an appraiser may call out certain issues for repair, and lenders cannot approve an FHA loan until those fixes are made and documented.
Appraisals and inspections are not the same thing, and it’s important to understand the difference.
Your mortgage lender will require an appraisal to assess the fair market value of the home. The appraiser will also look for signs of structural integrity and livability, verify that there is sufficient access to heat, water, sewage, and electricity, and they’ll note any potential hazards.
Appraisals are mandatory in the homebuying process, and you’ll pay for the appraisal fee at closing. The cost is typically around $500, though FHA appraisals can cost a little more, and fees may vary based on where you live.
As useful as appraisals are, they are not meant to be home inspections. A licensed home inspector goes much deeper than an appraiser.
A home inspector will provide an in-depth look at the condition of your home. They’ll test the plumbing, heating, and electrical systems, and they’ll also look for structural issues. An inspector checks the appliances, and they can also test for high levels of radon or mold. You can also request a pest inspection to check for signs of termite damage or rodent infestations.
This is the kind of deep dive you want to have done before you take possession of the property. An inspection gives you a heads up on potentially costly problems, and it enables you to make an informed decision about whether to buy the house or cancel the sale.
A general inspection is usually around $500, and you pay that out of pocket. If you decide to get specialist inspections, such as a pest or septic inspection, those can range from $150 to several hundred dollars.
FHA property requirements FAQs
FHA loans may be used to purchase a home that will be your primary residence, including single-family homes, multifamily properties with up to four units, condos, townhomes, and manufactured homes. The property must also meet FHA property requirements for structural soundness, safety, and livability.
Most homes are eligible for FHA loan financing, as long as they meet the FHA’s property standards. An FHA appraiser will assess the home and surrounding property to ensure that it is safe, provides adequate access to heat, water, electricity, and sewage services, and that there are no safety hazards.
The appraiser will also determine the home’s market valuation, as FHA lenders cannot approve loans for more than the home is worth.
Sellers can always refuse a bid and go with another buyer, no matter the type of loan. But sellers may refuse FHA offers because they assume the strict FHA property requirements will hold up the sale or make it less likely to close.
But most homes will pass an FHA appraisal, assuming the price aligns with the fair market value of the property and the house has been well-maintained. A seasoned real estate agent can help you put forward a competitive offer with an FHA loan.
FHA loans are a means to homeownership for many low- to moderate-income homebuyers, and for those who can afford to make monthly mortgage payments but have low credit scores due to past issues.
If you think an FHA loan is right for your circumstances, don’t be put off by the property requirements. Now that you know what an appraiser will look out for, you can focus your home search on well-maintained properties that are likely to pass the FHA appraisal and increase your chances of getting your offer accepted.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.