June
26
,
2023
FHA mortgage loans require the home to meet minimum standards in order for the loan to be approved by your participating lender. There are some issues with the home that can make the lender think twice about approving the loan and there are some issues that leave the lender no choice but to deny the mortgage. Do you know what those are?
1. Homes Must Be Primarily Residential
It is possible to purchase a mixed-use property using an FHA home loan and its low down payment requirements, but if the home is not primarily used as a residence and has 50% or more floor space taken up by non-residential use it cannot qualify for an FHA mortgage.
Furthermore, FHA loan rules state that any non-residential use “may not impair the residential character or marketability of the Property” according to HUD 4000.1. All local requirements including zoning laws must be adhered to as well.
2. Transient Occupancy Properties (Such as Air B-nBs) Are Not in Compliance
A home purchased with an FHA mortgage cannot be rented out to people staying less than 30 days according to FHA home loan rules found in HUD 4000.1. FHA loans are not permitted for condo hotels, bed-and-breakfasts, or other “occasional occupancy” rental situations.
3. Compliance Issues and FHA Appraisal Standards
Your dream home may not be perfect; it may require repairs or corrections to be approved for an FHA mortgage. As long as such corrections are feasible and are not excessively expensive a standard FHA forward mortgage is possible. The FHA 203(b) mortgage is not allowed for homes in severe states of disrepair. HOWEVER, FHA 203(k) Rehabilitation Loans ARE possible for homes that would not pass an appraisal for a typical new purchase FHA 203(b) mortgage.
Ask your loan officer about this option.
4. Properties May Be Too Close to Potential Hazards
If a home is too close to a high-pressure gas pipeline, high voltage electrical wires, mining or drilling operations or other hazards, it may not be possible for your lender to approve the loan.
5. Homes May Be Near Certain Flood Zones Without Insurance
FHA home loans are not automatically rejected because the house is in certain natural disaster zones or corridors, but if the right kind of insurance is not available in that area, the lender may have no choice but to turn down the mortgage loan application for that property unless proper insurance coverage is found.
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FAQs
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What causes an FHA loan to be denied? ›
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Why would FHA not approve a home? ›
Properties May Be Too Close to Potential Hazards
If a home is too close to a high-pressure gas pipeline, high voltage electrical wires, mining or drilling operations or other hazards, it may not be possible for your lender to approve the loan.
What would disqualify a home from FHA financing? ›
The FHA says that examples of such problems include but are not limited to the following: Missing handrails. Cracked or damaged exit doors that are otherwise operable. Cracked window glass.
What would cause a house to fail an FHA inspection? ›
Structural problems and defects, including any signs that the property has foundation damage or wall damage. The inspector may, for example, take a look at any water marks on the walls or ceiling, or search for cracks in the foundation. Accessibility concerns.
Why would someone not qualify for an FHA loan? ›
If you've been through foreclosure in the last three years, or bankruptcy in the last two, you will not meet FHA qualifications and are not a candidate for an FHA loan. To qualify for the 3.5% down payment, your credit score will need to be at least 580.
Why do some properties not accept FHA loans? ›
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call 'Minimum Property Requirements,' if a property doesn't meet even one of them, financing falls through.
What won't pass an FHA appraisal? ›
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Why are FHA loans so hard to get? ›
Borrowers must meet certain requirements to qualify for an FHA loan. For example: The home you consider must be appraised by an FHA-approved appraiser. You can only get a new FHA loan for your primary residence, which means it can't be an investment property or second home.
What are the red flags for FHA appraisals? ›
An FHA red flag is any safety hazard, health hazard, or deteriorating element of a home that would jeopardize financing. While one red flag might be linked with a home's backed-up sewage system, another home's red flag might be a crumbling foundation. At best, an FHA red flag can slow down the closing process.
FHA Loan Eligibility
- Proof of steady employment history and verifiable income.
- A minimum credit score of 580 with a 3.5% down payment.
- A debt-to-income ratio of 45% or less (see below)
- The home must be your primary residence and the property must meet HUD guidelines.
FHA loans are generally best for homebuyers with lower credit scores, limited down payment savings or both.
What makes a house not financeable? ›
Homes with major condition issues, such as those that impact property's safety, structural integrity, or livability, often don't qualify for conventional financing.
Why would a home not pass FHA? ›
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
Are FHA inspections hard to pass? ›
Is It Hard to Pass a FHA Inspection? As long as the property meets the 3 minimum standards set by the HUD, it shouldn't be hard to pass a FHA inspection. To increase the property's chances of passing, prepare for the FHA inspection in advance. Check the property for hazards, broken systems or parts, and quality issues.
What happens if an appraisal comes in low with FHA? ›
FHA lenders cannot approve a loan for more than the appraised valuation, so if the appraisal comes in low, you will need to pay the difference in cash or negotiate a lower purchase price with the seller.
How often do FHA loans get denied? ›
Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%. Conventional loans, not backed by the government, typically have stricter credit and income requirements.
Is it hard to qualify for FHA? ›
In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.
