The Federal Housing Administration (FHA) makes homeownership possible for many; however, it can also be a barrier to completing a sale because of its minimum property standards.
— These requirements impact both the buyer and seller, as both lose out on a possible deal.
On the surface, the FHA’s minimum standards sound reasonable: the home must be safe for the occupants, secure for the property kept inside, and sound, which means that it’s free of physical deficiencies or issues that could affect its structural integrity. While most of these requirements are common expectations when buying a property, physical deficiencies can be subjective. For example, a motivated buyer may not see needed bathroom repairs as a deficiency that blocks the sale – but an appraiser might.
The FHA has these rules in place because the house will act as collateral for the loan. If the buyer fails to make payments, then the FHA will foreclose on the house and auction it off to pay off the loan. However, if the property has issues, then the FHA may lose more money on the loan than it otherwise would.
“Lenders want to make sure the home is actually worth what you're paying for it so that in the unlikely event that you fall into foreclosure, the lender has an asset it can easily sell to recoup its money,” says financial journalist Matthew Frankel. “Therefore, if the home doesn't appraise for enough, it can create a problem.”
If a home meets the minimum standards, then it should fetch a higher price. However, where does that leave home buyers that are looking for a good deal – or sellers that need to get out from under a troublesome property?
While home buyers get some benefit from the minimum standards, as they protect the buyer against buying a money pit that will require high cost repairs, they can be a burden to sellers. This is especially true for sellers who need to sell fast and don’t have money to upgrade the home.
If the FHA refuses financing on a home, a buyer’s best recourse is to ask the seller to make the repairs. However, it’s likely that they won’t be able to afford the repairs, especially if the home is priced low for a quick sale. Unless the buyer is willing to pay more for the home or can qualify through a lender with lax polices, the sale is usually impossible.
For sellers who cannot afford to make repairs, the best option is usually a cash buyer, as they don’t need a lender’s approval to make the purchase. Cash buyers are free to invest in any property they choose and are less hesitant to purchase a property that needs work.
For more information about dealing with the FHA’s minimum property standards, contact us at (281) 533-5555 or visit http://www.cashofferforhouse.org/ for more information.
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