Home Inspections and FHA loans

I read an article the other day regarding the need for a home inspection, and how using a completed inspection report (with issues found) to get out of a contract under a financing contingency can be both immoral and fraudulent. I partially disagree. 

The article states that if a lender doesn't have a real reason to deny you the loan, the lender shouldn't deny it -  that it isn't honest and it forces the lender to act in a way that could carry severe repercussions.  Yes, I wholeheartedly agree with that statement. But the article goes on to say that the lender should deny the loan only for real financial reasons, not at the whim of every remorseful buyer. The part that I disagree with is that sometimes, a loan denial is not always about financial reasons, per se. Sometimes, a home inspection report IS the reason why you cannot get proper financing - especially if you have applied for an FHA loan. 

There are minimum standards that a home must be in, in order for FHA to fund the loan: Safety, Security and Soundness. FHA does not require the repair of cosmetic defects, or even minor defects, if they have nothing to do with these three standards. But if they do fall within those categories, then FHA will require the repairs to be addressed prior to the purchase of the home. If not, then your loan will be denied, and the seller will need to find another buyer that can purchase in cash or get a non-FHA loan. (A non-FHA loan, however, can also sometimes face the same problem if the inspection findings are severe - it really just depends on the lender and their underwriter). 

So comes the question of whether to waive the home inspection contingency in order to "win" the contract. If you are an FHA applicant, then it might be smart to just nip this issue in the bud and simply limit your search of homes to those in better "turn-key" condition - otherwise you might find that you are losing a property that you have your heart set on. Because whether or not you waive the home inspection contingency, you may still lose the home no matter what your take is on what to do about repairs needed on the home. Sometimes, an appraisal will find some issues, but only if they are not latent defects (an appraiser is not trained to do what a home inspector would do). And any issues found by an appraiser may cause the appraisal to fall below the minimum value needed for a loan approval. And FYI - an appraisal contingency cannot be waived in an FHA loan. 

If you are a non-FHA applicant, and especially if you are purchasing in cash, then ask yourself whether it is worth the potential repair costs involved if a non-contingent home inspection report finds major faults with the property - because in that case, you will face the dilemma of addressing the problems yourself, and cannot rely on the seller to do anything about them.

As always, feel free to send me a message if you have any questions. Hope you have a great weekend!