Why Would a House Not Qualify for FHA?

The Federal Housing Administration (FHA) offers mortgage insurance on loans, making homeownership more accessible for many individuals by providing benefits like lower down payment requirements and more flexible credit qualifications. While FHA loans ease the path to financing for borrowers, the property itself must undergo a stringent evaluation to ensure it meets specific criteria. Understanding these property eligibility requirements is important for anyone considering an FHA-insured loan. A property’s condition, type, location, and legal standing all play a role in whether it can qualify for FHA financing.

Property Condition Standards

The FHA mandates that homes financed with its loans adhere to Minimum Property Requirements (MPRs) and Minimum Property Standards (MPS), ensuring the dwelling is safe, structurally sound, and secure for its occupants. FHA appraisers specifically assess properties against these standards during the appraisal process. The appraiser’s role is not a full home inspection, but rather to identify conditions that pose health and safety risks or affect the property’s structural integrity.

Significant structural defects can lead to a property’s disqualification. This includes major foundation issues, such as large cracks or signs of significant settling, severe roof damage, or extensive cracking in load-bearing walls. The FHA requires the roof to be fully functional, with no leaks or extreme damage, and to have at least two years of remaining useful life. Properties with such issues may require repairs before FHA financing can proceed.

Health and safety hazards are also a primary concern for FHA eligibility. Appraisers look for exposed electrical wiring, active water leaks, and uncontained lead-based paint in homes built before 1978. Any chipping or peeling paint in pre-1978 homes must be addressed due to potential lead hazards. Furthermore, properties must have adequate heating, functioning plumbing, and operational electrical systems. Pest infestations, such as active termites, which can compromise structural integrity, are also red flags.

Essential functionality of a home’s systems is also evaluated. This means that major appliances included in the sale, along with heating, electrical, and plumbing systems, must be operational. The FHA aims to ensure the home is livable from day one without requiring substantial repairs to basic systems. While minor cosmetic flaws, like worn carpets or outdated finishes, typically do not disqualify a property, any issues affecting habitability or safety will be flagged.

Property Type and Eligibility

Not all types of residential properties are eligible for FHA financing, or they may come with specific FHA requirements. The property’s classification itself can be a reason for non-qualification. The FHA aims to ensure the property aligns with its mission of providing safe and sound housing for owner-occupants.

Condominiums, for instance, must be located within an FHA-approved condo project for individual units to qualify for FHA financing. If a condominium project is not on the FHA’s approved list, or if its approval lapses, units within that project generally cannot secure FHA loans. Approval for a condo project involves evaluating its financial health, owner-occupancy rates, and the adequacy of its reserves. At least 50% of units must be owner-occupied, and no more than 15% of units can be over 60 days delinquent on assessments.

Manufactured homes must meet specific HUD code standards, be permanently affixed to a foundation, and be situated on land owned by the borrower. They must have been built after June 15, 1976, and possess a HUD certification label, which confirms compliance with federal construction and safety standards. Additionally, manufactured homes must be classified and taxed as real estate, not personal property, and typically need a minimum living area of 400 square feet.

Multi-unit properties can be financed with an FHA loan, but specific owner-occupancy rules apply. An FHA loan can be used for properties with up to four units, provided the borrower intends to occupy one unit as their primary residence for at least one year. This owner-occupancy requirement distinguishes them from investment properties.

Cooperative (co-op) housing is generally not eligible for standard FHA loans. Ownership in a co-op involves purchasing shares in a corporation that owns the property, rather than direct real estate ownership. This structure does not align with FHA collateral requirements for residential properties.

Properties with commercial components are typically ineligible for FHA financing if the commercial space is significant or primary. A minor commercial component might be acceptable, but it must be incidental to the primary residential use and not detract from the dwelling’s residential character.

Site and Environmental Considerations

External factors related to a property’s location or immediate surroundings can impact its FHA eligibility. The FHA aims to ensure properties are situated in environments that do not pose undue risks to occupants’ health, safety, or the property’s long-term value.

Environmental hazards can lead to disqualification. This includes properties near hazardous waste sites, high-voltage power lines, or areas with excessive noise from airports or major highways. The presence of toxic chemicals, pollutants, or contamination from methamphetamine production can render a property ineligible until certified safe. Properties must be free of known environmental and safety hazards.

Properties located in Special Flood Hazard Areas (SFHAs) require flood insurance. While not an automatic disqualifier, certain flood zones or unavailability of flood insurance can lead to non-qualification. For new construction in SFHAs, FHA’s updated standards, effective January 1, 2025, require the lowest floor to be at least two feet above the base flood elevation to reduce flood damage.

Adequate access to the property is also required. The property must have direct and legal access from a public or private street. Issues such as landlocked properties without recorded easements, or those accessible only through unmaintained private roads, can disqualify a property. This ensures year-round accessibility.

Severe and persistent nuisances can also render a property ineligible. These include excessive noise, odors from industrial facilities, or other detrimental external factors that significantly affect the property’s marketability and livability. Appraisers report such “externalities” that may impact value or habitability.

Legal and Ownership Issues

Reasons for non-qualification can also stem from the legal status of the property or its ownership structure. The FHA requires a clear and marketable title to protect the interests of both the borrower and the lender. Any legal encumbrances or unusual ownership arrangements can create obstacles.

Title issues are a common cause of disqualification. Clouds on title, such as unrecorded deeds, unresolved liens, or unclear ownership, prevent the transfer of clear and marketable title. Outstanding property taxes, judgments, or unreleased mortgages could all create a cloud on title. A clear title ensures undisputed ownership and a secure lender’s lien.

Deed restrictions or covenants can also pose problems if they are overly burdensome or prevent the property from being used as a primary residence. If restrictive covenants limit the property’s use in a way that conflicts with FHA guidelines or significantly affects its marketability, it may not qualify.

Major additions or renovations completed without proper permits can also lead to non-qualification. Unpermitted structures may raise concerns about safety, structural integrity, and the property’s legal footprint. An FHA appraisal may flag these issues, requiring the borrower or seller to obtain proper permits or rectify the unpermitted construction before loan approval.

The FHA also has a specific “property flipping rule” designed to deter predatory practices. This rule generally states that if a property is resold within a short period, typically 90 days, after the seller acquired it, it may be ineligible for FHA financing. This aims to prevent inflated prices from quick turnaround sales. If a property is resold between 91 and 181 days with a significant price increase, a second appraisal may be required.