Who pays for FHA appraisal repairs? Seller credit rules

Who pays for FHA appraisal repairs?

Whoever your purchase contract names. The Federal Housing Administration (FHA) handbook doesn't pick a payer. It sets what each payment does to your loan. Ask the seller to finish the repairs before closing, and price each one first. If the seller offers money instead, the label matters: the handbook treats a "repair allowance" differently from a credit toward closing costs, so confirm the wording with your loan officer before you sign.

Key takeaways

• On a $250,000 FHA purchase, $5,000 written as a repair allowance cuts your maximum loan by $4,825. If your closing costs are at least $5,000, the same $5,000 toward them cuts nothing.
• Your lender, not the appraiser, decides which repairs are required. Get that list from your loan officer in writing.
• Age alone doesn't make a repair required. The handbook says an appraiser "should not recommend replacement because of age" for a part that is "functioning well."

What repairs can an FHA appraisal require?

The appraiser checks the home against the Department of Housing and Urban Development's (HUD) Minimum Property Requirements (MPR). For each shortfall, the appraiser must "provide an estimated cost to cure" and make the appraisal conditional on the repair (section II.D.3.n). Required repairs are limited to what's needed to "maintain the safety, security and soundness of the Property; preserve the continued marketability of the Property; and protect the health and safety of the occupants."

Two examples from the handbook. A roof with "less than two years of remaining life" makes the appraisal "subject to inspection by a professional roofer" (section II.D.3.g). On a home built in or after 1978, the appraiser must "require repair of any defective paint that exposes the subsurface to the elements" (section II.D.3.i); older homes fall under the lead-based paint rules instead.

Cosmetic items are "not required." The handbook's examples include holes in window screens, cracked window glass and a dripping faucet. The appraiser only suggests. "Regardless of the Appraiser's suggested repairs, the Mortgagee will determine which repairs are required." The mortgagee is your lender.

Can a seller credit pay for FHA repairs?

Yes, but only a credit toward closing costs leaves your loan alone. HUD counts a seller's contribution toward your "origination fees, other closing costs including any items POC, prepaid items, and Discount Points" (section II.A.4.d.iii, Interested Party Contributions). Sellers and other interested parties, combined, "may contribute up to 6 percent of the sales price." Anything above your actual closing costs, or above that limit, is "considered an inducement to purchase."

The handbook lists "repair allowances" as an inducement (section II.A.4.d.iii, Inducements to Purchase). Inducements "result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property," the value your loan is based on. The same list includes "paying off consumer debt," so a credit used that way costs you the same.

A credit toward closing costs, inside both limits, still frees your own cash for repairs after you move in. How a repair credit works at closing shows where it lands on your Closing Disclosure.

What does a repair allowance cost you?

Take a $250,000 home that appraises at or above the price. The seller offers $5,000. For a purchase, "the maximum LTV is 96.5 percent of the Adjusted Value" (section II.A.2.b.ii), where LTV is loan-to-value. That maximum applies if your credit score is "at or above 580" (section II.A.2.b.i).

Example: as a closing-cost credit, your loan is based on the full $250,000, so the maximum loan is $250,000 times 96.5 percent, or $241,250. As a repair allowance, the value drops to $250,000 minus $5,000, or $245,000, and the maximum loan is $245,000 times 96.5 percent, or $236,425.

The repair allowance cuts your maximum loan by $4,825 ($241,250 minus $236,425), which you bring as cash. The closing-cost version works only if your actual closing costs are at least $5,000. Your loan officer runs both versions on your real Loan Estimate.

Can the buyer pay for FHA required repairs?

Yes. Your lender "may add repair costs to the sales price before calculating the mortgage amount" if all three are true (section II.A.2.a.v, Appraiser Required Repairs):

• "the repairs are required by the Appraiser to meet HUD's MPR"
• "the repairs are paid for by the Borrower"
• "the sales contract or addendum identifies the Borrower as the party responsible for payment and completion of the repairs"

The amount added is "the lesser of: the amount by which the value of the Property exceeds the sales price; the Appraiser's estimate of repairs; or the amount of the contractor's bid." If the home appraises exactly at the price, the first figure is zero, so nothing gets added. Get a contractor's written bid either way, since it's one of the three caps.

What if the seller refuses to make FHA repairs?

The repairs are still required. Your lender has to see them done, or escrowed, before it closes the loan. You have four moves:

• Pay for them yourself, with the contract or an addendum naming you as responsible, so your lender can add the cost under the cap above.
• Ask for a closing-cost credit that fits under the cap and your actual closing costs, then fix things after you move in.
• Ask your lender about an escrow for work that can't finish before closing.
• Walk away, if your contract gives you a way out.

Your contract sets the deadlines and terms, so confirm them with your agent or attorney. Repairs vs. credit vs. price reduction compares the options side by side.

Do FHA repairs have to be finished before closing?

Yes, unless your lender sets up an escrow. When the appraisal calls for repairs, "the Mortgagee must comply with Repair Requirements" (section II.A.3.a.iii). Your lender "must obtain evidence of completion," on Fannie Mae Form 1004D when the appraiser checks the work (section II.A.3.b).

If the work can't finish in time, the lender "may establish a repair escrow." That's allowed only if the home is "habitable and safe for occupancy at the time of loan closing" (section II.A.6.a.viii, Repair Completion Escrow Requirements). The funds "must be sufficient to cover the cost of the repairs," and your own labor "may not be included in the repair escrow account." Whether your lender offers one is its call, so ask your loan officer early.

How do I know what my FHA repairs will cost?

Start with the appraiser's cost to cure, then get a contractor's written bid on each required item. If the appraiser flagged something your inspector also found, Kept prices every line of an inspection report for $79, usually under 4 hours, using its published method. That gives you a second number beside the appraiser's. What to ask for after a home inspection covers which findings are worth a request.

If the appraiser's list lands while your inspection deadline is still open, upload your report to Kept and answer the seller with a number on every line.

Sources

• HUD Handbook 4000.1, Single Family Housing Policy Handbook, Update 18