June 27, 2014
A reader asks about a refinance loan situation where “an appraisal is done there’s a recommendation of installing an electric line water heater and roof sealing, can the loan be approved without doing these improvements or can the cost be added to the mortgage loan to do so?”
If the FHA appraiser recommends corrections or alterations, these are usually done as a condition of loan approval and may require a compliance inspection to insure they have been accomplished. However, the second part of this reader question does offer the borrower some possibilities when the borrower is required to pay for the fixes.
According to the FHA loan rules published in HUD 4155.1 Chapter Two, Section A, under the heading titled, “Adding Repair and Improvement Costs to the Sales Price” we find the following:
“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.
Important: Only repairs and improvements required by the appraiser may be included.”
That’s the rule for new purchase FHA loans, but what about refinancing loans? According to HUD 4155.1, for Streamline Refinances, “FHA does not require an appraisal on a streamline refinance. These transactions can be made with or without an appraisal. FHA does not require repairs to be completed on streamline refinances with appraisals, with the exception of lead-based paint repairs. However, the lender may require completion of repairs as a condition of the loan.”
And for cash-out refinance loans? According to HUD 4155.1, these instructions to the lender apply:
“Add the following to the existing first mortgage amount:
• any purchase money second mortgage
• any junior liens over 12 months old
• closing costs
• prepaid expenses (even if the lender refinancing the loan is the servicer)
• borrower-paid repairs required by the appraisal, and
• discount points.”
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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