FHA home loans can simply be defined as loans that are insured by the Federal Housing Administration (FHA). Originally formed to spread homeownership throughout communities and provide affordable housing opportunities, the FHA not only offers mortgages at more reasonable demands than conventional loans do, but has insured more 34 million properties since its formation in 1934.
Lenient FHA loan standards make this type of financing very popular among today’s buyers. These standards include:
1. Very low down payments – typically 3.5% of the purchase price or as low as .5% through independent lender/state programs. Conventional loans generally require a minimum 5% down payment.
2. Low mortgage rates – lower rates are due to the notion that FHA doesn’t assess risk-based pricing for credit scores below 740, FHA loan rates are often a quarter to a half of a percentage point lower than average conventional rates.
3. Easier qualifications – FHA loans have looser guidelines than mortgages backed by Fannie Mae and Freddie Mac, which open up opportunities for buyers who do not qualify for conventional or VA financing. Some lenders allow FICO scores as low as 580, while others may require a minimum 620 credit score.
Despite having these “easy standards,” FHA has certain requirements that all properties must meet in order to obtain financing. The U.S. Department of Housing and Urban Development (HUD) requires FHA-financed homes to meet minimum property standards to ensure safety, security and soundness of the property.
Minimum FHA Property Standards
1. Complete property – The desired home must exist as an entire, marketable piece of real estate. FHA loans are not available to finance a single room or to replace a kitchen. Sufficient space for living, sleeping and specific areas for cooking and dining must be available, as well as sanitary facilities such as bathrooms (not limited to) with functioning showers/tubs.
2. Public access – Properties being financed through an FHA loan must have public access to the property. Houses that do not make this requirement must have an appropriate easement added that provides public access.
3. Free of any internal hazards – The property itself must be safe to live in. Any excessive pollution, radioactive materials, mudflows or other hazards must be dealt with before FHA financing can take place.
All utilities such as, but not limited to water, gas, electric and sewer services must be independent for the property, with no linkage to another property. Multiple (more than 1) unit buildings have to maintain a separate shut-off switch for each unit.
4. Proper drainage system – All water drains must deposit water away from the property perimeter walls to avoid damage and flooding. Furthermore, all drinking water and showering water must be safe for human contact. The water heaters have to provide somewhat of a warm temperature, and all sewage disposal should meet basic sanitation inspection.
5. Required safe construction expectations – Although FHA is more lenient than other mortgage insurers, any property that is going to be funded must meet minimum construction guidelines to ensure the soundness and safety of the property. These include the repair of any defective work on the house, poor quality work, leakage, decay caused by termites or any other condition that impairs its safety, sanitation or structural soundness.
6. Stable roof tops – All roofs of homes backed by the FHA must have sound roofs that show zero evidence of missing tiles, shingles, or clear signs of leaking issues.
The minimum property standards above apply to most areas of the U.S. and were established to protect both the homeowner and the FHA against unnecessary losses.