Property condition guide & what inspections do lenders require?

Real estate agents and their buyers often find property condition regulations perplexing, as lenders interpret government and conventional agency guidelines in varying ways with some lenders imposing additional stricter rules, known as overlays. In this discussion, we will review these agency regulations, noting that individual lenders may have different interpretations. For instance, banks frequently apply overlays and enforce more stringent property condition standards compared to wholesale lenders working with mortgage brokers.

There is a common misconception in the real estate industry that a property requiring repairs can easily meet the criteria for a conventional loan but may face challenges qualifying for a government loan such as FHA, VA, or USDA. However, this is not always the case. A property with health and safety repair issues must have those problems resolved before finalizing any standard loan program.

When a home is sold in as-is condition, it may affect the buyer's expectations regarding repairs the seller is willing to make, but this aspect holds no significance to a lender or an appraiser.

The most crucial factor determining the acceptability of a specific loan program will be the appraiser and their assessment of the property's condition.

FHA and USDA loans require an appraisal by appraisers who are licensed by the state and approved by FHA. VA appraisals are conducted by appraisers who are approved by VA and licensed by the state. Conventional loans, on the other hand, only need to be appraised by a state-licensed appraiser. To be approved by either FHA or VA, an appraiser must have not only more experience but also meet more rigorous qualifying criteria. Due to the higher level of experience needed and the additional scrutiny of appraisal report quality by FHA and VA, government appraisers are more attuned to potential property condition issues, which may lead them to identify repair conditions that a conventional appraiser might overlook.

Government loans come with property condition requirements that vary from those of conventional loans. Here, we will outline some of the typical property condition issues that frequently occur.

Pest report

• A pest inspection and clearance of section 1 items is currently mandatory on a VA loan in California.

• On FHA, USDA and Conventional, loan underwriting typically will want to review a pest inspection only if the appraiser calls for one in the written appraisal report after observing potential issues.

• Keep in mind a handful of lenders will require a review of the pest -and clearance of section 1 items if it's listed in the sales contract as a contingency, even though this is not mandatory.

• A common issue I see is when the seller gives a credit to the buyer in lieu of repairs via a contract addendum and even list the property's condition issues. This will trigger many lenders to require a review of the property conditions present that led to this type of seller credit.

Roof

• VA --Roof must have 2 years of remaining life and no more than 3 layers of shingles

• Unobservable roof can be reported on by examining the attic and ceilings for leakage

• The appraiser will not only look over the roof and try to spot any potential problems, but also inspect the connecting parts such as a chimney, the eaves of the home, any skylights, and the connection of the gutters to the roof.

Heating

Government appraisers have a greater responsibility to determine if the heat source is adequate and meets guidelines.

• General Guidelines All habitable rooms and areas where plumbing is located must have an automated heat source that can maintain 50 degrees Fahrenheit and not be reliant on human intervention for long periods of time

• Wood Stoves & Solar Systems Acceptable with certification that they were installed according to manufacturer’s recommendations. Must ALSO have a conventional automated heat source as described in general guidelines above. Utilizing baseboard -or nearby -mounted electric wall heaters in each room will often be a quick fix for a home that only has a wood stove for heat.

• Floor Heaters Acceptable. If repairs are needed or there is an insufficient heat source for the home, an upgrade to a conventional heat system will be required

• Non-conventional Heating Systems Space heaters or non-conventional heat sources must comply with local codes and fulfill the general guidelines above.

  If it does not comply, a conventional heating system must be installed

• Propane Tanks Must be located a safe distance from the home.

  Must have ownership of propane tank UNLESS only leased tanks are available and normal for the area

• VA Loan Conventional heating system must be present in all homes to maintain temperature of 50 degrees in areas with plumbing (i.e., wood stove typically cannot be the only heat source).

Appliances

• What is considered “normal” for the area.  In some states or areas, it is completely normal to either leave in the home or take appliances that are not built in. 

• Built-In Appliances:  If appliances are built-in and have a permanent structure to the property, the appraiser will consider those as part of the “value” of the property. Therefore, ensuring they are in working order before closing on the home is important.

• Detached Appliances are considered “Personal Property,” so the appraiser would determine if there were an impact on the market value of the entire property if those appliances were not included. 

Lead Paint, Especially Peeling Lead Paint

Homes built before 1978 are more likely to have lead-based paint. The federal government banned consumer use of lead-based paint in 1978, but it is still present in millions of homes. Activities that disturb lead-based paint (like sanding, cutting, replacing windows, and more) can create hazardous lead dust and chips which can be harmful to adults and children.

• Homes built before 1978 No chipped or peeling paint on interior or exterior of home and/or structures and improvements

• Homes built after 1978 Exterior defective paint that exposes subsurface must be repaired.

• Contractors making repairs must be “certified” (8 hours of training).

• If repairs are done by a contractor, underwriter will require a copy of EPA or the State’s Lead Based Paint Training Certificate.

• When a borrower does the painting/repairing they must sign certification that they met EPA requirements and provide receipts as supporting evidence

• Final inspections are typically done by the original appraiser—but they will only certify that repairs have been completed, they will NOT certify compliance with EPA requirements.

Mold

Mold, especially Black Mold, is highly toxic. A mold test can be performed as part of your home inspection. If they do find mold, it can quickly be remedied by a mold specialist with the completed repairs typically certified by the appraiser.

Home inspection report, Transfer Disclosure Statements & AVIDS

A lender on conventional or government loans shouldn't require these, and if they do, they are overstepping what is common in the mortgage industry . In the past, I have seen certain state sponsored loan programs require a home inspection report be provided as part of the loan approval process.

For more specific information on the condition of the property based on the type of loan program, refer to the corresponding articles.