Property Condition for Government Loans

  Many times when people are qualified to use one of the government loans-FHA, VA or USDA they are concerned about property condition issues and whether or not those issues will disqualify a property they may be considering.

  Fifteen or twenty years ago there was a long laundry list of condition issues that the appraiser had to check off as being satisfied in order for the loan to proceed.  Today's government loan is not nearly as restrictive.  The reason for property condition requirements is that both VA and USDA are 0 down programs and FHA has a small down payment.  First and foremost if Uncle Sam is backing a loan, HUD wants to ensure that the homes funded by these programs are in habitable condition in case they wind up in foreclosure.  Secondarily, by ensuring certain property condition standards are met, it decreases the likelihood that the borrower will have an expensive repair during the first year or two they reside in the property-the assumption being that borrowers who use these loan products may not have a large amount of assets to pay for repairs.

  What exactly needs to be in good repair so the property qualifies for the loan?  The following is a list of items that we see appraisers cite most often.  There are other issues of course that are not on this list, but these are the biggies:

1) Five years life in the roof
2) No peeling paint on properties that were built prior to 1978
3)100 amp circuit breaker box
4) Ground Fault Interrupter outlets within six feet of water
5) If there is a negative grade that allows water to drain towards the foundation, gutters will be required to be installed
6)No broken windows, holes in drywall. 
7) No exposed concrete or subflooring
8) No plumbing leaks
9) Heating and Cooling must work
10) Basement and crawl space must be dry
11) If the water and sewage system is provided by private well and septic, that minimum distances between the two are satisfied.

 Chances are if the property that has been selected meets these requirements there will not be an issue with property condition.  Even if the appraiser cites one or more of these items; if the buyer or the seller can make repairs the loan will move forward.  The problem comes into play when neither party can afford to repair the necessary items prior to closing or the property is bank owned and the bank will not repair the items or allow anyone else to repair them. In that case, the borrower needs to buy the property using cash or use one of the rehabilitation loans such as the FHA 203K streamline loan.  While conventional mortgages aren't underwritten specifically using the above conditions, an underwriter can still call to have repairs made as a condition of closing the loan.