Question Details

Eli, Home Buyer in 10704

Can an FHA Lender deny mortgage on an AS IS property in need of cosmetic renovations? We recently

Asked by Eli, 10704 Sun Jul 27, 2008

applied for an FHA mortgage for a house we're really interested in- an REO property mainly in need of cosmetic repair. Many rooms have had the carpets removed and only the subflooring is present. I've read that homes must meet minimum safety standards set forth by FHA but I can't tell if missing carpet or marked/damaged walls are deal breakers if we are willing to do the repairs at our own cost after closing.

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Eli-
I am sorry to hear that you have been having such trouble with a 203k. At Flagstar, we actually have an entire 203k dept that pretty much all applicable clients go to. Because 203k loans require extensive training for the bank to certify a loan officer to do, most of the time clients are sent straight to our 203k dept so that a step is not missed and each client receives optimal service. I'm not sure how much time you have until closing or if the seller is willing to work with you on an extension, but I would be glad to help you with such a loan. I think you would be quite happy with it and it would more suit your needs.
Let me know if I can help.
Luke Allison
Flagstar Bank
828-777-8828
Luke.Allison@flagstar.com
0 votes Thank Flag Link Sun Jul 27, 2008
Eli,

Sorry you are having so much trouble with an FHA. I work with several incredible lenders in Wisconsin that specialize in 203K and one of my buyers just moved into her "new" home and is ready to refinance. The appraisal already came in higher than the anticipated amount.

Keep calling around, ask a few real estate agents for a referral. There is definitely some one in your area who does 203K. It is a great program and is helping many established neighborhoods get the royal treatment.
0 votes Thank Flag Link Sun Jul 27, 2008
Thanks for your input, Luke & Vicky. We originally considered the 203K and had absolutely no luck finding a lender that actually had heard of it, much less processed them.

We decided on FHA financing so that we could minimize our down payment so that our total available liquid cash could be shared among down payment, closing costs AND necessary repairs on this home. If we went with conventional loan, we'd have to use our savings for down payment and closing and would have little to no money remaining to make any necessary repairs or purchases once we're occupying the home. At the time, we didn't realize that FHA had minimum standards or that the missing carpet and minor damage to walls might result in FHA either denying the loan or that they might require the seller to foot the bill for such repairs. Being an REO complicates it further because they are less likely to entertain an offer with contingencies, such as those that would be required by FHA lender in this case.

This home is a wonderful value, exactly what we're looking for and we are willing to put in the work and expense of repairing what is needed, but it seems our use of FHA financing is really going to hold us back during the offer stage.
0 votes Thank Flag Link Sun Jul 27, 2008
Eli - it is generally the responsibility of the seller. Theoretically, you could say in the contract that you will be responsible for repairs totalling a max of X dollars that may be required for FHA funding. The bank still may not permit that, since it would be their liability if someone got hurt doing the work, and I have heard that many do not carrying property insurance at all. If I were your agent I would not suggest this because- what if you put $5-10K into it and then the bank could not get clear title and could not sell you the property? Or, what if the place burnt down w/no insurance? It's just not a good idea. There is an FHA 203K loan that is for renovations, although I was completely unsuccessful in finding someone that actually does them... even after I went to the HUD site and found the list of companies that have closed those loans in the last year and called every single one. Well, one company did, but I never quite understood that they could only prequalify my buyer for $50K less than they qualified for everywhere else. Obviously, that didn't work.

I am not sure why you are going FHA. I hope you're not relying on seller funded Down Payment Assistance options, because they are about to disappear. If it is not that, check for renovation loans. They are not as competitive - but some are close. I know Bank of America has a good renovation loan - check with your local branch if you have one nearby. If you have a renovation loan, you've got a better shot at getting this house.

If it is in such disrepair - why do you like it so much? Just curious. By the way, this thing does not email me if you have questions, so email me at vchrisner@kw.com with any other questions; I am happy to help if I can.
0 votes Thank Flag Link Sun Jul 27, 2008
You could go with an FHA 203k loan instead of the standard FHA loan. This allows for repairs to be included in your loan and hence do not need to be completed before closing. Also, with a 203k you do not need to hire a contractor - you can do the work yourself. One more thing - after the rehab is done, you can refinance with no prepayment penalty and roll the loan into conventional and possibly eliminate mortgage insurance. It's a great way to get the work done and build equity, all in one mortgage.
Luke Allison
Flagstar Bank
828-777-8828
Luke.Allison@flagstar.com
0 votes Thank Flag Link Sun Jul 27, 2008
Thanks, Vicky. Appreciate your response.

That is definitely a concern of ours- that the REO bank will turn down our offer. We want to present the strongest offer possible, and do not intend to include any contingencies. We will not be asking for the REO bank to make or pay for any repairs. Despite this, is it common for the REO bank to turn down offers with FHA financing just so they steer clear of responsibility for any repairs that the FHA appraiser might require? Is there any way that we can contractually preclude the REO bank from being responsible for remedying or repairing defects- or is this automatically their liability/responsibility in the eyes of the FHA lender?
0 votes Thank Flag Link Sun Jul 27, 2008
Eli-
Any lender can pretty much deny an FHA file what it determines to be their own interpretation of the FHA guidelines. Some lenders are strict, some are graceful. I work for a lender who I feel offers some very forgiving guidelines on repais and maintenance for FHA loans. In my opinion, it should be more of a rational decision by the underwriter as to what should fall under "health and safety" issues and address them specifically. I have seen issues come up the day of closing that took no more than $2 and five minutes to resolve but I understood the underwriter's reasons for asking they be fixed.
Based on what you described, your underwriter should be allowing you to move the file through without much headache. However, they probably have chosen to side with the lender and make the work get done. I would light a fire under your loan officer and try and get him/her get an explanation as to what the lender is looking for. If not, move on to a lender who has easier underwriting requirements for FHA repairs.
I will be glad to help you if you have any questions.
Luke Allison
Flagstar Bank
828-777-8828
Luke.Allison@flagstar.com
0 votes Thank Flag Link Sun Jul 27, 2008
and if you ask the fha appraisers you'll get varying answers. the problem is you can't screen your appraier, and they are the ones making the call. they are reading the same thing you are. i just closed an fha deal - the stairs on the outside that lead up to the front door were leaning. my dad is a builder, i sent hm to look at it. he said it had no footer under one structural support beam. my buyers are fine and plan to replace the steps in the entirety. the fha appraiser went out there and wrote up that 2 boards needed to be replaced because of dryrot.

could he not see that the entire structure was falling apart? what a bozo.

so, the owner (the bank) agreed to make the $350 repair to replace the rotted boards, and we closed, about 10 days ago. my client has already replaced the entire set of steps.

sometimes things don't make any sense to me.

having said all of that - the bank (owner of reo) will likely turn down your offer, regardless of price, because they'll have the same concerns. read my blog - it might give you some insight.
0 votes Thank Flag Link Sun Jul 27, 2008
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