Home Equity , Mortgages

Can You Buy An As-Is Home With An FHA Loan

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 4 minute read

It’s only natural that you’d want to make your house stand out from the competition if you’re planning on selling it. Taking the time to fix minor issues, clear the clutter, and deep clean the interior and exterior are all crucial. 

While preparing your property for sale is essential, it’s also important to make it appealing to the Federal Housing Administration (FHA). Many homebuyers opt for FHA mortgages because of the low down payment requirements, favorable terms, and affordable monthly payments. 

Since the Federal Housing Administration (FHA) only needs a 3.5% down payment, FHA mortgages are especially appealing to first-time homebuyers. The popularity of FHA mortgages makes it important for you, as a seller, to understand what you can do to increase the likelihood that the FHA will approve your home for financing.

What Does the FHA Do?

The Federal Housing Administration (FHA) operates under HUD in the United States (HUD). HUD and the Federal Housing Administration were founded on the principle of making homeownership possible and affordable for all Americans. 

The Federal Housing Administration (FHA) insures mortgages to alleviate some of the risks that lenders take on when providing consumer credit. Lenders are more likely to extend credit to more purchasers, expanding consumers’ pool of potential homebuyers. 

More people who may be interested in purchasing your home is always good news. More people will look at your home if it is FHA-approved. If your house does not conform to FHA standards, you will automatically eliminate around a third of your potential purchasers because of the large share of mortgages that are FHA-backed.

Making Your House FHA-Friendly

Knowing what the FHA expects from a mortgage applicant is the best approach to assure that interested purchasers will be able to use an FHA loan to fund the purchase of your house.

1. Determine an appropriate price.

There is a maximum loan size that the FHA will insure, but that number varies from year to year and from city to city. The typical highest mortgage amount is just over $271,000. However, in cities like San Francisco where real estate is substantially more expensive, the FHA caps mortgages at little over $729,000.

The maximum loan amount is governed by FHA regulations. This is to say, it’s the sum that can be borrowed on a loan once the buyer has paid the required down payment of 3.5 percent of the purchase price. A good starting point is ensuring that your home’s market value is within the range established by local authorities.

2. Make the house inspection-ready.

Safety, health, and compliance with construction codes are just some of the things that home inspectors look for. Although similar, home inspections and valuations serve different purposes. So, even if the home is appraised at market value, that doesn’t guarantee it will pass inspection.

Making sure that all of the appliances and fixtures in your home are in good working order will greatly increase the likelihood that it will pass its inspection. FHA requires that the roof, HVAC, plumbing, and fixtures such as the toilets, showers, and bathtubs all be in good functioning order. 

You can get an inspection done on your own home for a fee to see what needs to be fixed. There will be plenty of time for you to make the necessary adjustments before the buyer arranges for a formal house inspection.

3. Provide Assistance with Closing Costs

In a buyer’s market, when there are lots of homes for sale and yours is just one of many, offering to cover some of the buyer’s closing costs might help your home stand out. Under FHA guidelines, a seller can contribute up to 6% of the buyer’s closing costs. 

Many first-time buyers have to use FHA mortgages, so if you can assist them with the closing expenses, it will help you sell your property faster.

Non-FHA Eligible Properties

1. Homes With Encroachment Issues

The land is ineligible for an FHA loan if it has a garage, shed, utility easement, residence, or other structure that is held by a neighbor or third party but encroaches on the homeowner’s property.

2. Uncompleted Houses

A certificate of occupancy, issued by the county inspector, confirms that a property is safe for human habitation and must either already exist or be readily available for the home in question. 

The plumbing in the kitchen and bathrooms must be in functioning order, and there must be hot water available. FHA loans cannot be used for homes with structural flaws that make them unsafe to live in, such as missing roofs or walls.

3. Rental and investment properties

Only owner-occupied residences and vacation properties are funded by the FHA. There’s a considerable probability that any rental property you presently own won’t be eligible for FHA financing.

Bottom Line

Making your house more appealing to potential purchasers will hopefully lead to a higher number of showings and more offers. In the end, it may facilitate a straightforward, fruitful transaction. 

You can make sure your efforts aren’t in vain and that you obtain the best price for your property by arranging it such that it stands out when examined by the FHA.

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