Why An FHA Duplex Loan Isn’t The Big Bad Wolf

Just like you can’t believe everything you read on the Internet, you can’t believe everything you hear in real estate.

Take, for instance, the urban myth that Minneapolis and St Paul duplex sellers shouldn’t even consider an offer for a buyer using an FHA insured mortgage, even if, in multiple offers, it is for significantly more than an offer from another buyer.

An FHA mortgage is one in which the buyer may put as little as 3.5 percent down to qualify for a loan to owner occupy a duplex, triplex or fourplex. While the money is lent to the buyer by a traditional bank, the Federal Housing Administration (FHA) agrees to insure the loan against the buyer defaulting. Just like any insurance, there is a cost to this which is passed on to the buyer as a monthly premium.

Before agreeing to insure the loan, the FHA wants to know that the duplex is safe for someone to live in. So, when the lender sends an appraiser to the property, FHA sends along a checklist. They ask the appraiser to compare the property to their health and safety standards. If the property fails, the item or items must be repaired before they will agree to ensure the buyer’s loan.

Sounds scary, right? Here’s the deal. Almost everything they look for can either be seen by the buyer or their Realtor when they first look at the property or will be called out if the buyer hires a professional inspector.

I think you’ll be surprised when you see how minor the items on the FHA checklist are. They include:

• The lot needs to be sloped away from the foundation. In other words, water shouldn’t be coming into the basement because the exterior grade drains toward the duplex.
• All bedrooms need egress windows. (This is required in order for a room to be considered a bedroom anyway!)
• If the property was built before 1978, it may contain lead-based paint. This can potentially be a health hazard. So, the appraiser makes sure it isn’t cracked or peeling anywhere.
• All steps and stairways must have a handrail.
• The duplex has to have a working heating system that’s big enough to heat the property.
• The roof shouldn’t be leaking – or look like it will leak in the near future.
• The foundation should be in good enough shape to support the duplex.
• There shouldn’t be any cracked or broken glass in windows.

In my 16 plus year career, I have had an FHA appraiser have issues with a duplex or single family home less than a handful of times. They involved a cracked pane of glass, some peeling paint, and a handrail. I don’t think a single one of those repairs cost the sellers more than a couple hundred dollars or an hour or two of time; and they were all items that had come up during the buyer’s home inspection!

Refusing a strong clean offer that has an FHA loan because it might require the seller to do minor repairs seems rather ridiculous, doesn’t it?