The FHA's Minimum Property Standards

Homebuyers intending to finance a home purchase with a Federal Housing Administration (FHA) loan may be surprised to learn that they won't be allowed to purchase a particular property because it doesn't meet FHA requirements. Why do these requirements exist, what are they and can they be remedied so that buyers can purchase the homes they want? (For more, check out Understanding FHA Home Loans.)

TUTORIAL: Mortgage Basics

Why the FHA Establishes Minimum Property Standards
When a homebuyer gets a mortgage, the property serves as collateral. In other words, if the borrower stops making the mortgage payments, the lender will eventually foreclose on the borrower and take possession of the house. The lender will then sell the house to get back as much of the money it lent as possible.

Requiring that the property meet minimum standards protects the lender. It means that the property should be easier to sell, and command a higher price if the lender has to foreclose. At the same time, a borrower is more likely to stay in a home that meets minimum standards, because he or she will not be burdened with expensive home repair bills from the start. Also, borrowers will try harder to make payments during difficult financial times if the home is a pleasant place to live.

Minimum Property Standards – What Are They?
According to the U.S. Department of Housing and Urban Development (HUD), the FHA requires that the properties financed with its loan product meet the following minimum standards:

Safety: The home should protect the health and safety of the occupants.
Security: The home should protect the security of the property (as explained in the previous section).
Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.

It then describes the conditions the property must meet to fulfill these requirements. An appraiser will observe the property's condition during the required property appraisal, and report the results on the FHA's appraisal form. (Property appraisals are one of many requirements buyers fulfill before settling on a deal, for more see Housing Deals That Fall Through.)

For single-family detached homes, the appraiser is required to use a form called the Uniform Residential Appraisal Report. The form asks the appraiser to describe the basic features of the property, such as: number of stories, year it was built, square footage, number of rooms and location. It also requires the appraiser to "describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.)" and asks, "Are there any physical deficiencies or adverse conditions that affect the livability, soundness or structural integrity of the property?" The condominium unit appraisal form is similar but has condo-specific questions about the common areas, homeowners association, number of owner-occupied units and so on.