FHA Rules for Adding Repairs to the Home Sale Price

July 30, 2014

If you have ever wanted to buy a home, but in the end decided to pass on the deal because of repair costs, you might be affected by the FHA loan rules for such situations under the right circumstances.

HUD 4155.1 is the rulebook for lenders that, among many other things, spells out guidelines on how situations like these (and many others) are to be handled. Chapter Five of this rulebook says that certain repairs and improvements can be added to the sale price of the home before the lender calculates the amount of the mortgage. This can ba done when:

• repairs and improvements are required by the appraiser as essential for property eligibility, and paid by the borrower,
  and
• sales contract or addendum identifies the borrower as responsible for payment, and completion of the repairs.”

Before you start making plans to install a swimming pool or consider a roof replacement, consider that FHA loan rules in this section also add, “Only repairs and improvements required by the appraiser may be included.”

Chapter Five explains how this process works in the section titled, “Repair and Improvement That Can Be Added To The Sale Price”. Here’s what that section tells the lender:

“The repair and improvement amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of the

• amount that the value of the property exceeds the sales price
• appraiser’s estimate of repairs and improvements, or
• amount of the contractor’s bid, if available.”

FHA loans also permit certain weatherization upgrades to be added to the sale price under the proper circumstances. Chapter Five states, “The mortgage amount may be increased if the cost of energy-related weatherization items paid by the borrower is added to the property. Examples of energy-related weatherization items include

• thermostats
• insulation
• storm windows and doors, and
• weather stripping and caulking.

These items may be added to both the sales price and the appraised value before determining the maximum mortgage amount. Note: A contractor’s statement of the cost of work completed, or the buyer’s estimate of the cost of materials must be submitted.”

One very important caveat to all this is included in Chapter Five--take note of the FHA loan rule which states repairs and improvements cannot be included in the sale price when they have been completed before the FHA appraisal.