why would a home not qualify for an fha loan

Why Would a Home Not Qualify for an FHA Loan?

If you’re considering applying for an FHA loan to purchase a home, it’s important to understand the eligibility requirements. The Federal Housing Administration (FHA) has standards that properties must meet in order to qualify for one of their government-backed mortgages. While FHA loans offer attractive benefits like low down payments, they aren’t available for just any house

In this comprehensive guide, we’ll outline the top reasons a home might not qualify for FHA financing. Understanding these FHA property requirements ahead of time can help you avoid disappointment and wasted time later in the homebuying process

FHA Loan Overview

First, a quick overview of FHA loans. The FHA mortgage program is run by the U.S. Department of Housing and Urban Development (HUD). These government-insured loans are popular with first-time home buyers because they only require a 3.5% down payment. Borrowers also only have to pay an upfront mortgage insurance premium of 1.75% of the loan amount.

Because the government insures FHA loans, there are eligibility requirements for borrowers as well as the properties being purchased. The home must meet HUD’s minimum property standards to qualify for financing.

Top Reasons a Property Wouldn’t Qualify for an FHA Loan

While FHA loans are more flexible than conventional mortgages, there are situations where a home simply won’t meet the requirements. Here are the top reasons a property might not qualify for an FHA loan:

1. Major Structural or Safety Issues

The FHA requires that properties be “safe, sound, and secure.” Homes with major structural problems like a severely compromised foundation or collapsing floors/ceilings could be deal-breakers. Safety hazards like exposed wiring, broken railings, steps in disrepair, fire hazards, and more can also cause a property to fail inspection. If the home has major structural or safety issues that would be overly difficult or expensive to fix, it likely won’t qualify for FHA financing.

1. Termite Damage or Active Infestations

Related to the above point, termite damage or active pest infestations are also grounds for FHA loan denial. Properties must be structurally sound, so untreated termite damage that compromises the stability or safety of the home would disqualify it. Additionally, active infestations of any kind that could affect livability or resale value could make a home ineligible as well.

1. Plumbing, Electrical, or HVAC Issues

For a home to meet FHA inspection guidelines, the major systems need to be in working order. This includes the plumbing, electrical, and heating/cooling systems. While minor repairs are acceptable, serious issues like widespread plumbing leaks, faulty electrical wiring, non-working furnace, dysfunctional water heater, etc. could lead to FHA loan denial. Faulty systems that are expensive to replace may cause the property value to come in lower than the purchase price, which is another potential deal-breaker.

1. Roof Damage or Leaks

Roof issues are another common reason homes don’t qualify for FHA loans. The roof must be in good condition without any major defects, damage, or leaks that cause interior damage. An aged roof near the end of its useful life may need replacement soon and could also lead to appraisal issues.

1. Foundation Problems

As mentioned under the structural integrity requirement, foundation issues can make a property ineligible for FHA financing. Cracks wider than 1/8 inch, severe cracks, crumbling foundation walls, sinking, bulging, and other defects could signal the foundation is unstable or unsound. Homes with foundation problems have a higher risk of further issues down the road, making them riskier for FHA insurance.

1. Mold or Water Damage

Properties with mold or unremediated water damage also face a high likelihood of FHA loan denial. Water leaks from faulty plumbing or roof damage can lead to moisture issues and mold growth, which presents health hazards. The FHA wants to minimize risks to both homeowners and their insurance fund, so unchecked moisture or mold issues are red flags.

1. Sewage System Issues

Homes relying on septic systems also have to pass inspection to qualify for FHA loans. If the septic tank or drainage fields are failing, the property won’t be eligible. The septic system must be in proper working order and up to local code in order for the home to qualify.

1. Ineligible Condo or PUD Project

In addition to inspecting the individual property, the FHA also reviews the condo or planned unit development (PUD) project for approval. If the project hasn’t been approved by HUD, FHA mortgages can’t be used to buy units within it. Reasons projects are rejected include litigation, excessive owner-occupancy ratio, and financial stability issues of the HOA. Make sure it’s on the FHA approved projects list before proceeding.

1. Unique or Unmarketable Properties

Sometimes a home’s unique characteristics may make it unsuitable for FHA financing. Geodesic dome homes, earth berm constructions, and log cabins can fall into this category in some cases. If the appraiser determines the property’s uniqueness negatively affects its marketability or value stability, the FHA may deny the loan.

1. Located too Close to Hazards

Proximity to certain hazardous conditions or sites is another factor that can derail FHA approval. Homes located too close to high-pressure gas/oil pipelines, chemical storage facilities, high-voltage transmission lines, and other recognized environmental concerns may not qualify due to safety risks. Flood zones without adequate flood insurance available is another hazard-related example.

1. Zoning or Building Code Violations

The FHA also checks that properties comply with all local zoning laws and meet building code requirements. Unauthorized additions, illegal conversions, and other building code violations could make a home ineligible if bringing it up to code proves difficult or expensive. The property must meet all federal, state, and local legal requirements to qualify for financing.

1. Commercial Properties or Vacation Homes

FHA loans are only available for primary residences, or in some cases secondary homes meeting certain conditions. Commercial properties like apartment buildings, mixed-use properties with over 50% commercial space, condo hotels, and other non-residential properties are ineligible. Vacation homes and rental properties also don’t qualify in most cases.

Tips for Finding an FHA-eligible Home

Now that you know what can make a property ineligible for FHA financing, here are some tips for finding one that will qualify:

• Have the property thoroughly inspected – Go beyond a simple home inspection and order pest, mold, roof, structural/foundation, and septic inspections to uncover any issues early.

• Ask the seller to make repairs for any deficiencies found during inspections. This can help the home pass FHA appraisal.

• Search the HUD condo approval list to ensure the project allows FHA loans before making an offer on a condo.

• Avoid unique properties like dome homes that may have issues getting FHA approval. Stick to conventional designs.

• Check flood maps and research the area to make sure no environmental hazards are located nearby.

• Confirm with the local zoning office that there are no code violations on the property.

• Work with an experienced real estate agent familiar with FHA guidelines who can help you avoid ineligible homes.

The Bottom Line

While FHA loans offer nice perks for buyers, not every house qualifies for these mortgages insured by the government. Homes with structural problems, safety hazards, major system issues, damage, zoning violations, and more can all lead to denial of FHA financing. By understanding these FHA eligibility requirements in advance and carefully vetting properties, homebuyers can avoid disappointment and find a home that will successfully qualify for approval.