FHA loans have become increasingly popular over the last few years. In fact, the Federal Housing Administration’s share of the mortgage market has increased from 5% to more than 30% since the housing market crashed. Because these loans are more prevalent in the marketplace, it’s important to understand how they work.
Property requirements are a key aspect of the FHA program. In order to be approved for a government-insured mortgage loan, a house or condo must meet a specific set of requirements. These requirements are outlined in HUD Handbook 4150.2, chapter 3, which is available online.
FHA Property Requirements at a Glance
If a home buyer wants to use an FHA loan to purchase a certain property, it must meet the general acceptability criteria outlined in the HUD handbook mentioned above. Here are the basic property requirements for FHA loans.
- There are several different types of properties that qualify for FHA financing. The building may be a detached residence, a semi-detached residence, a multiplex, a row house, or an individual condo unit.
- If the property is a condo unit, the entire condominium complex must be on the FHA’s approved condo list. This list can be found on the HUD website.
- The house must not have any hazards or adverse conditions. According to HUD, these are defined as conditions that affect the health and safety of the homeowner or the structural integrity of the property itself. Property hazards that can derail an FHA loan include hazardous materials, insufficient drainage, groundwater problems, toxic chemicals, flooding, excessive noise, and erosion. This is only a partial list of hazards. For a complete list of FHA property requirements, refer to HUD Handbook 4150.2.
- If the property has a septic system, the FHA appraiser must inspect the area to make sure it operates properly. The appraiser will evaluate the type of septic system in use, the topography of the surrounding area, soil permeability, depth to groundwater, and other factors that may affect operability.
- The appraiser will also check for soil contaminants around the property. If there is any indication of hazardous materials leaking or leaching into the soil, an additional inspection may be required.
- In order to meet FHA property requirements, the house must have proper grading on all sides. This means the ground must slope away from the house to allow for proper drainage. Water should drain away from the perimeter walls, not toward them.
- Sufficient water supply is another key requirement for FHA properties. In order to qualify for FHA-insured mortgage financing, the house or condo must have hot water, a continuous supply of potable (drinkable) water, bathroom facilities, and a safe method for sewage disposal (i.e., either septic or public sewage connection).
- If the house uses well water, you’ll encounter another set of rigorous property requirements. The FHA appraiser must ensure that the well provides sufficient water flow to for all fixtures in the house, and that it is fully operational. Again, all of these FHA property requirements can be found in HUD Handbook 4150.2.
- Termite inspections are another FHA property requirement, but they are only required in certain cases. The termite inspection must be performed on (A) any ground-level structure and (B) any structure with wood in direct contact with the ground. A second-floor condo unit is one example of a property that may be exempt from this particular requirement.
- The HUD handbook also provides a list of “defective conditions” that must be corrected before the home can be purchased with an FHA loan. This list includes leaking pipes, structural decay, standing water, termites, defective construction, or other conditions that reduce the safety, sanitation, or structural integrity of the property being purchased.
- Crawlspaces and attics must have some form of ventilation to prevent the buildup of excessive moisture and/or heat. The FHA appraiser is required to inspect these areas to ensure proper ventilation is in place.
- The appraiser will also carefully examine the property’s foundation. This is another key requirement for FHA properties. The foundation must be in a solid state of repair. A variety of building materials are acceptable, as long as they are in good condition. The foundation can be made of concrete, brick or stone.
- If the house has a crawlspace, it must be thoroughly inspected by the FHA appraiser. The crawlspace must have access to allow for this inspection. Floor joists must be high enough off the ground to allow access for maintenance and repair work on plumbing and ducts. The crawlspace must be free from debris and obstructions, and it must have some form of ventilation in place. Standing water is a problem here as well.
- In order to meet FHA house requirements, the property must have a solid roof that is free of defects and decay. The appraiser must ensure that the roof is structurally sound, and that it prevents moisture from entering the property.
- Mechanical systems are another key requirement for FHA properties. In this context, a mechanical system might include a furnace, a heat pump, central air-conditioning, electrical systems and the like. In short, these systems must be safe to operate, in good repair, and adequately protected from destructive elements.
- An FHA property must have some form of house heating that is sufficient for “healthful and comfortable living conditions.” Electrical heating systems must also meet local municipal codes for safety.
- The section of the HUD handbook that outlines FHA house requirements has a separate appendix for solar energy systems. If you are selling a home with one of these systems, or buying a house that has one place, I would refer you to HUD Handbook 4150.2, Chapter 3, Appendix B.
- In order to meet FHA house requirements, the property must have sufficient electricity throughout all living spaces. In short, electricity must be available for house lighting and for any installed systems that are part of the home.
Despite its length, this is a partial list of FHA property requirements. For a more detailed list, refer to the HUD handbook mentioned repeatedly throughout this article.
Making Repairs After the Inspection
If a house falls short of one of these requirements, that doesn’t necessarily mean the loan will fall through. Granted, some items are deal breakers. But most items can be repaired or remedied prior to closing.
If the FHA appraiser finds an item that needs to be repaired, he will make a note of that particular repair requirement. If the appraiser makes a subsequent visit and finds that all items have been fixed, he will give the property a “green light.” He will note in his report that the house meets all of the FHA’s property requirements. At this point, all property-related restrictions will be lifted, and the loan will be allowed to proceed.
Disclaimer: This article was published in 2014 and reflects guidelines available at that time. HUD frequently makes changes to the Federal Housing Administration’s loan program. As a result, portions of this article may become inaccurate or outdated over time. Although we make every effort to keep our information current, this website is no substitute for the official HUD website when it comes to FHA property requirements.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author