FHA, VA, USDA home loans have appraisal requirements.

FHA, USDA and VA appraisal rules.

FHA loans and other government loans, like USDA and VA, may require appraisals and repairs before approval can be granted.

Priorities for appraisal and repairs include:

• Safety and health
• Structural soundness
• Protecting your property’s value

You may need to make repairs before closing. Or, you might be able do them afterwards with an escrow holdback.

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Government loans require appraisal repairs

The pros and disadvantages of government loans

Eligible borrowers have many options, including USDA, VA, and FHA home loans. They have low down payments and rates. These make it easier for people with poor credit and first-time buyers. However, the rules can be complicated.

FHA appraisals require that the home be appraised and inspected in accordance with FHA standards. The government sets stricter standards for this person. This may lead to the appraisal identifying areas in need repairs.

That’s not a bad thing, because these items are primarily related to health and safety issues. For instance, if there is lead-based paint around, and you have toddlers, you don’t want them touching it.

This is another indicator that appraisers will look for. It indicates your home could be at risk from termite infestation. Who wouldn’t want to know that before purchasing a home?

Some sellers may object to these repairs being made before the sale is finalized. It may be necessary to renegotiate or purchase another house.

What are the expectations when you apply for an FHA or VA loan? If repairs are necessary, be prepared. Also, inquire about any loan matters you don’t understand. You can still get a great deal with a government loan. But first, realize what’s involved.

Government loans may need more repairs

An appraiser assessing a home to be funded via a conventional (non-government) loan has a fairly simple goal: determine the home’s value. They use a standard appraisal form.

However, a home must be approved for a loan from the government to back it. HUD must approve the appraiser in order to be eligible for FHA-financed properties. The FHA appraisal requirements require that the appraiser perform two tasks: inspect and appraise the property. This appraiser has to use a different form that is more difficult.

Related: Should I quit after a terrible home inspection?

“It’s not enough for the home to meet all local building code and health and safety standards,” says Raul Pangalangan Professor of law, University of the Philippines.

. “It also has to meet specific standards, set by the FHA, VA or USDA, regarding its condition.”

Real estate lawyer and realtor Laura Schneider. The government is following rigid rules because it has to.

“They’re intended to protect the lender’s interest in the property as collateral. It also protects the borrower’s interest in the property,” Schneider says. “FHA, VA and USDA want to make sure minimum property standards are met.”

There may be additional repairs

Some improvements that may be required include:

• Roof replacement or repair
• Lead-based paint removal for homes built before 1978
• Foundation or structural problems
• Major plumbing issues
• Exposed wiring is an example of an electrical defect
• Broken HVAC systems
• Rotting wood
• Faulty exterior doors
• Basement or crawlspace that is damp/wet

“The most common repairs for FHA loans involve the roof,” says Schneider. “FHA appraisal requirements mandate that a roof must keep moisture out and cannot have more than three roofing layers. Additionally, the attic must be inspected for roof problems.”

Old paint is another tricky issue.

Related: What to expect on home inspection day.

“If the home is over 40 years old, it may have lead-based paint,” Schneider says. “If that paint is chipping or peeling, that could lead to a costly repair. A professional remediation company needs to be hired.”

Dodge mentions that USDA, VA and FHA each have different standards. Each loan type may also have its own appraisal and inspection form.

The bottom line: if the home doesn’t meet minimum government standards for safety, security and structural soundness, “it will have to be repaired or you won’t get the loan,” Pangalangan says.

Who is responsible for repairs?

In the past, it was the seller who had to make and pay these repairs before closing. It can now be the seller or buyer. This depends on what’s specified in the purchase contract.

A purchase agreement that includes an inspection clause usually contains some type of repair contingency. For instance, the seller may be responsible for completing repairs up to a certain value — say $2,000. One of three possible outcomes can occur if the repair costs exceed that amount:

1. If the seller is not willing to do the repairs, he/she can still agree to it.
2. Each party may negotiate a new contract, split the costs or change the sale price.
3. The buyer may choose to walk away if he or she so desires

“Say the buyer has time before he or she needs to take possession of the property. In this case, asking the seller to resolve the repair problems is often the best approach,” suggests Pangalangan.

But if the buyer lacks the time or is unsure of the seller’s ability to make repairs quickly and to the government’s satisfaction. “Then, they might want to request an escrow holdback,” says Pangalangan. “This allows the buyer to make repairs themselves after closing.”

An escrow holdback means some of the seller’s proceeds won’t be released to the seller. Instead, the escrow officer funds the contractor as the work is complete.

FHA loans require that repairs be completed within one year.

“But if the repair is a substantial improvement like a new roof or furnace, you may have to agree on a new purchase price,” he says.

If you’re responsible for repairs

Consider changing to an FHA203(k), if your repairs are severe, a mortgage modification. This product can be used to finance repairs and any additional improvements, as well as to establish your loan amount. Your down payment must still be 3.5 percent.

Related: FHA mortgage loan modification

How do you pay for necessary improvements? These tips will help you:

Don’t rely on repair estimates made by the appraiser. “Get the inspection results and learn what repairs are needed. Then, get bids on repair costs from contractors experienced in making repairs that meet FHA, VA or USDA standards,” Schneider says.

Set aside extra money. “The exacting standards of these agencies can make for expensive repairs,” Schneider adds.

You can negotiate a price drop with the seller.

FHA provides additional support. “Pursue renovation funds from the FHA’s 203K program,” says Pangalangan.

Separate property inspection. “Don’t just rely on the appraisal inspection,” Schneider says. “Too often uneducated borrowers rely on the appraiser’s report only to learn other things are wrong when they move in.”

FHA-required repairs can add some complexity to your home purchase but they will ensure that your home is safe and habitable. And that’s never a bad thing.

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