The government insures loans for relatively risky home-loan borrowers, promising to repay mortgage lenders if loans go bad. As a government insurance provider, the Federal Housing Administration tries to minimize its risk, as well as that of the lenders that make the loans. A home inspection and appraisal inspection are two tools the FHA and its lenders use to protect their financial interests. The FHA mandates home inspections when your transaction involves a renovated home or new manufactured housing.
Distinguishing Between Inspections
Two important distinctions exist between an FHA appraisal inspection and a standard home inspection. First, an appraisal inspection is an evaluation of property condition and value that only an FHA-approved appraiser can complete. A standard home inspection involves evaluating the home and site, and can be conducted by an inspector not affiliated with the FHA. The second major difference is the report's intent. An FHA appraisal is primarily for the lender's sake, rather than the borrower's. A home inspection is intended primarily for the borrower, rather than the lender. A home appraisal is generally required for most FHA transactions, with the exception of certain streamline refinances. A home inspection is usually optional, although strongly recommended by the Department of Housing and Urban Development and real estate professionals.
Buying a Renovated "Flip" Home
Buying a "flip" property entails purchasing a home from a seller-investor who has owned it for less than 90 days. "Flips" are renovated or cosmetically altered properties that result in a profit to the investor who repairs them. FHA borrowers can buy "flipped" homes because the FHA occasionally waives its traditional 90-day holding period provision in an effort to increase homebuying opportunities. Two appraisal inspections are needed when a "flip" will result in more than a 20-percent price jump between the investor's purchase price and the FHA transaction price. An initial appraisal identifies repairs the investor made, which help the lender determine whether the price jump is justified. It also identifies property defects that still need repair. A subsequent appraisal confirms that the seller completed mandated repairs. The FHA also requires a standard home inspection report from an independent inspector to confirm that no additional defects exist. The FHA lender may also require repair of defects identified in the home inspection.
Renovating a Distressed Property
An FHA borrower can buy and renovate a foreclosed or otherwise distressed property using a 203(k) rehabilitation loan if he plans to live in it. A 203(k) loan combines two loans -- a purchase loan and construction loan -- into a single home loan. It involves an appraisal inspection to determine a current value and a projected value after repairs are completed. A 203(k) transaction involves inspections after closing and as work is completed. An FHA-approved 203(k) inspector must sign off on repairs before the borrower can draw from the 203(k) repair escrow account to pay contractors.
Manufactured Home Inspection Policy
The FHA insures loans used to buy, transport and affix manufactured housing to a permanent foundation. Manufactured homes must meet standards outlined in the Permanent Foundations Guide for Manufactured Housing. The FHA requires that a licensed engineer or architect inspect the foundation for compliance with the guide and provide a Certification on Foundation Compliance upon installation. The FHA only insures loans on homes manufactured after June 15, 1976, which are built in accordance with the Department of Housing and Urban Development standards known as "HUD Code." In addition to a mandatory FHA appraisal inspection, a borrower may opt for an independent home inspection for his own purposes.
- Los Angeles Times: FHA to Extend Rule Permitting Loans on "Flips" of Fixed-Up Homes
- Department of Housing and Urban Development: Mortgagee Letter 2009-16: Manufactured Housing Policy Guidance - Property and Underwriting Eligibility
- 203khomeloanrehab.com: 203k Loan and Renovation Financing: Guest Columnist: How A HUD Consultant’s Inspection Differs From A Standard Home Inspection
- Department of Housing and Urban Development: General Program Information: What is a Manufactured Home?
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