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It is a really safe bet the above property is not going to be sold using government backed financing-and in actuality probably not conventionally either. The financing that will work for this property is cash - there really is no other option. But the good news is that you can use a government loan to purchase a property that isn't in perfect condition. The intent of HUD in these instances is not to force a buyer into a perfect property but to ensure to the best of everyone's knowledge that the main systems of the home-the ones that require the most money to repair or could be safety hazards are in working order for the next couple of years at least. The assumption being that people who use government mortgages don't have a large pool of money from which to draw to make repairs should they be necessary.
Who decides what is good enough condition for a government loan you may ask?
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The decider in this case will be the appraiser, a disinterested third party. Since the appraiser is the eyes of the lender it is their job to determine any issues that are not in compliance with the required property conditions of the loan. Here is a short list that appraisers look for when evaluating properties for HUD sponsored loans-this list is NOT all inclusive as a creative appraiser can come up with a condition issue that even I haven't seen before: (And I admit it, I am old, I've seen a lot.)
-100 AMP electrical service
-5 years life on the roof
-no negative grade along the foundation
-no water or puddles in the basement or crawl space
-no plumbing leaks
-GFE outlets required on switches and outlets within six feet of water
-railings on any stairs of more than two steps
-no peeling paint on homes that were built pre-1978
-mechanicals must be functional
-no mold or active wood devouring insects or structural damage due to wood devouring insects
all floors must have acceptable floor covering whether carpet, vinyl, laminate or hardwood-no bare subfloors or concrete exposed on homes built on slab foundations
-water test for all unoccupied properties that are on wells
These are the items that I see noted by appraisers to be repaired most often. Sometimes whether or not a particular condition issue is cited has a lot to do with the appraiser. Some appraisers cite for peeling paint on buildings such as garages not attached to the house-others don't. The appraiser can also ask for further inspections on items that may be questionable - such as the life of the roof when the appraiser is unsure whether it meets the criteria.
Just as an aside both VA and USDA loans do require water tests and a termite inspection whereas with FHA that is at the appraiser's discretion.
What happens if the appraiser finds something that needs to be repaired? The repair then becomes a condition of closing the loan which means it has to be done prior to closing day and verified by the appraiser. Generally speaking if a whole house inspection has been completed, none of this should be a surprise and the repair may have already been addressed. But in case it wasn't, either the buyer or the seller can arrange to have the repair done. Typically seller's pay for it but not always. The only tricky part comes in when the seller is a bank that is selling a foreclosure. Banks are not the most congenial of sellers and sometimes will not make the repair. Not only will they not make the repair they also will not allow the buyer to make the repair so we end up in a chasing our tail situation. The buyer's lender won't close without the repair, but the bank that owns the property won't make the repair nor will they allow the buyer to make it.
But it isn't only the government loans that have property condition requirements. Conventional lending has tightened up as well. The point is that lenders don't want to loan money on properties that are in disrepair. Recently I had an appraiser cite peeling paint on a 10% down conventional loan. If the paint turned out to have been lead based paint, remediation was required. There is no fool proof method of buying a property in poor condition other than cold hard cash.
I frequently have borrowers want to buy more than the purchase price so they will have money to repair a property. The days of borrowing excess money and having the appraiser value the property
"as repaired" closing and collecting the money and doing what ever with the excess funds are long gone. Seems there were just too many people who took the money and didn't do the repairs. So when the bank foreclosed they were left with a property that wasn't worth the value they had loaned as well as in bad condition. There are two FHA products that do allow repair money over and above the purchase price of the home-the Streamlined 203K and the 203K. The streamline version is for cosmetic repairs and to repair and replace the existing structure and problems within the house. The maximum amount allowed by the loan is $35,000 and there can be no structural repairs made with that loan. The larger of the two the 203K goes up to $55,000 and requires a HUD consultant on board the program. Both loans also require licensed contractors to do the work-these are not programs for the do it yourselfer.
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