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
Heating
Appliances
Lead Paint, Especially Peeling Lead Paint
Mold
Home inspection report, Transfer Disclosure Statements & AVIDS