July 10, 2013
When you want to purchase a home with an FHA mortgage, one of the most important steps after choosing the property is the appraisal. An appraisal is required in order to establish the fair market value of the home and to make sure the home lives up to FHA minimum property standards.
Appraisals may result in some required improvements, corrections or alterations to the home in order to bring it up to minimum standards. In such cases, the appraiser may make FHA loan approval conditional upon the completion of these changes and require a compliance inspection to make sure the fixes or alterations now bring the home up to standard. In such cases, is the borrower permitted to include the cost of this work in the sales price of the home?
The FHA loan rules, as spelled out in HUD 4155.1, addresses this question in Chapter Two, Section A under the heading “Adding Repair and Improvement Costs to Sales Price”. It says in part:
“Repairs and improvements may be added to the sales price before calculating the mortgage amount when the repairs and improvements are
− required by the appraiser as essential for property eligibility, and
−paid by the borrower, and
sales contract or addendum identifies the borrower as responsible for
− payment, and
− completion of the repairs.”
The FHA adds an important note saying, “Only repairs and improvements required by the appraiser may be included.” There is further guidance published in this section which states:
“The repair and improvement amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of the
• amount that the value of the property exceeds the sales price • appraiser’s estimate of repairs and improvements, or
• amount of the contractor’s bid, if available.”
There is one final note borrowers should be aware of regarding this issue. Chapter Two, Section A adds, “Repairs and improvements completed by the borrower before the appraisal are not eligible to be included when calculating the maximum mortgage. This amount becomes part of the borrower’s required cash investment.”
Please note that this blog post does NOT cover the rules for FHA Energy Efficient Mortgages–that is a separate set of guidelines. The information above covers a situation where there are appraisal-required repairs or alterations.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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