What happens when a property is being sold as-is and the seller will not do repairs but the home doesn’t meet FHA minimum property standards (MPS)? How does the buyer qualify for an FHA loan? It’s a great question and a situation that happens quite often.
It’s worth mentioning that the seller is limiting his or her buyer pool significantly by not being open to make repairs. Unless the buyer pays cash, there will probably be issues getting any kind of financing if the property deficiencies are major.
But because sellers often don’t want to put another penny into the home, here are some options on how to handle the situation.
Buying a home “as-is” can seem like a great way to save money. After all you’re not paying for the seller to make any repairs or improvements before closing. But if you’re planning to use an FHA loan, buying an as-is home comes with some extra considerations.
What Does It Mean to Buy a House “As-Is”?
When a home is sold “as-is,” the seller is not required to make any repairs or fix any known issues before closing. This transfers responsibility for repairs and renovations to the buyer after closing.
As-is sales are attractive to buyers because they come at a lower price point than homes in good condition. However, as-is homes often have hidden defects that are uncovered after closing, leaving the new homeowner with expensive repair bills.
FHA Loan Requirements for As-Is Homes
FHA loans are popular options for first-time homebuyers because they only require a 3.5% down payment. But FHA loans come with stricter eligibility standards for the condition of the home being purchased.
The FHA requires properties to meet certain minimum property requirements (MPRs) to qualify for an FHA-insured mortgage MPRs relate to the safety, security, soundness, and habitability of the home
Some examples of MPR deficiencies that would disqualify an as-is home for an FHA loan include
- Major roof issues
- Chipping lead-based paint
- Major structural damage
- Faulty plumbing, electrical, heating, or cooling systems
- Infestations of termites, rodents, or other pests
- Standing water in the basement
The property must pass an FHA appraisal where the appraiser inspects for any MPR violations. Appraisers will also note more minor defects like worn carpets, damaged walls, and missing handrails. A few minor issues are acceptable, but major MPR violations make a property ineligible for FHA financing.
The FHA 203(k) Loan: An Option for Fixer-Uppers
If you have your heart set on an as-is home with FHA financing, the 203(k) loan is an option to consider. The FHA 203(k) loan program allows buyers to wrap repair costs into their mortgage loan.
There are two types of 203(k) loans:
- The Standard 203(k) can finance up to $35,000 in repairs
- The Limited 203(k) can finance up to $15,000 in repairs
To qualify for a 203(k) loan, the as-is home cannot have any structural issues or major health/safety defects. The repairs financed must also bring the home up to FHA minimum property standards.
203(k) loans take more time to close because multiple inspections are required during the repair process. Closing costs are also higher due to required fees for the extra administration and oversight.
Tips for Buying an As-Is Home with an FHA Loan
If you want to buy an as-is home using FHA financing, keep these tips in mind:
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Get a pre-approval letter first – This shows sellers you can get financing and makes your offer stronger. Lenders will evaluate your finances before approving.
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Inspect before making an offer – Pay for a home inspection so you know the full scope of repairs needed. Walk away if issues are too major for your budget/abilities.
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Ask sellers to make repairs – Some sellers may agree to make a few repairs if it means the sale goes through. Offer credits at closing to incentivize them.
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Consider a 203(k) loan – If repairs are within 203(k) limits, this financing can cover the costs. Just know it extends the homebuying timeline.
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Work with a real estate agent – They can guide you through the specifics of using FHA financing to buy as-is homes. Their expertise is invaluable.
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Have money set aside – Even with 203(k) financing, you’ll need cash for unexpected repairs that come up after moving in. Budget for surprises.
Weighing the Pros and Cons of As-Is FHA Homes
Below is a summary of some key pros and cons to weigh if you’re considering an as-is home with FHA financing:
Pros
- Lower purchase price
- Opportunity to add value through renovations
- 203(k) financing available for repairs
Cons
- Limited inventory – many as-is homes don’t qualify
- Higher fees and closing costs
- Additional inspections and paperwork
- Possible hidden defects not caught until after closing
- Still need cash reserves for unexpected repairs
Expert Tips on As-Is FHA Loans
Here is some advice from real estate and lending experts on using an FHA loan to buy an as-is property:
“As-is properties may not qualify for government-insured loans like FHA or VA. To qualify for this type of loan, properties cannot have defects like roof issues, chipping paint or other major deficiencies.” – Holden Lewis, NerdWallet
“Look for minor cosmetic issues rather than underlying structural problems or code violations when considering an FHA loan on an as-is home.” – Michele Lerner, real estate writer
“Work with an experienced agent and lender so you understand all the nuances involved with FHA financing on as-is homes.” – Ralph McLaughlin, Chief Economist at Kukun
“Do a deep dive into required repairs and get multiple quotes before deciding if a 203(k) loan makes sense.” – Allen Tuan, Realtor and real estate investor
Key Takeaways
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As-is homes with major issues won’t qualify for FHA loans – standards are strict.
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Minor cosmetic flaws are acceptable but structural/safety defects are dealbreakers.
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FHA 203(k) loans allow you to finance repairs up to $35,000.
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Inspections and paperwork increase when using 203(k) financing on an as-is home.
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Work closely with real estate and lending professionals who know the ins and outs of FHA requirements.
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Crunch the numbers carefully to decide if buying as-is is worthwhile for your situation.
Buying an as-is home with FHA financing can be done, but limitations exist. Being fully informed on the restrictions, costs, and processes involved allows you to make the best decision on whether it aligns with your homebuying goals and budget. Consult the experts and assess the pros and cons thoroughly before pursuing an as-is purchase using an FHA loan.
Option #2: The real estate agents make repairs
The real estate agents have a lot to lose if the transaction doesn’t close — often 3% of the purchase price. For this reason, it sometimes happens that agents come together to spend a few hundred or even a few thousand dollars to make sure the property meets FHA requirements.
This is rare and a risk for the agents since there is still a possibility that the loan won’t close.
In other words, don’t bank on the agents paying to make repairs, but it can happen.
Option #3: You make the repairs
Again, this is not an ideal way to handle the problem. You could spend a lot of money and effort, then the sale could fall through.
But buyers do sometimes pay for minor repairs just to get the house eligible for financing, and it has worked. Just take caution with this approach.
If you as the buyer are a licensed contractor, you may even be able to do some repairs yourself. It goes without saying you need to clear it with both agents and the seller before you try to gain access to the home or make any repairs to the home.
Can I Use a FHA Loan to Buy an As-Is Home?
FAQ
What would cause a house to fail an FHA inspection?
Why would a house not qualify for an FHA loan?
Why wouldn’t a seller accept an FHA loan?
Can you use an FHA loan to remodel a house?
Can I get FHA financing if I’m selling a house?
Give the real estate agents a copy of the home appraisal so they can see the issues first hand. The listing agent might be able to convince the seller to make repairs to meet FHA requirements in the interest of closing. Click here to see if you’re eligible for FHA financing (Mar 31st, 2024)
Do you need a first-time home buyer to qualify for an FHA loan?
In summary, while FHA loans are excellent for first-time buyers, they are open to everyone, regardless of whether it’s your first home purchase or not.Consider your specific financial situation and explore
Should I get an FHA mortgage if I buy a foreclosure?
When buying a foreclosure or real estate-owned (REO) home, the seller is often a bank that will not make repairs or grant access to the home so someone else can make them. In this case, there is often no way to make repairs. In this case, an FHA mortgage may simply not be an option and you’ll have to consider other loan types.
Can you buy a house as is?
Fannie Mae and Freddie Mac allow properties to be purchased “as-is” when there are only minor deficiencies or deferred maintenance. The home must be safe and sound, and structural issues must be minor and due to normal wear and tear. Here are examples of the kinds of defects that are generally acceptable if you’re getting a conventional loan: