For this part of the update, we’ll be discussing more of what it’s like to go through the FHA loan process. The FHA loan program is similarly restrictive when it comes to Appraisal reports but less restrictive for homeowner’s insurance requirements than the USDA Loan program!
The Appraisal Report
For FHA Home Loans, the appraisal report can cause some issues for borrowers. One of the biggest issues is if the home comes back at a lower value than the purchase price.
If the home appraises low, the seller and buyer will need to renegotiate the purchase contract agreement and come to a favorable result. If the seller chooses not to lower the price to meet the appraised amount, the transaction can be canceled and this can force the would-be home buyer to look for another home.
However, If the borrower wins the negotiation and the seller lowers the purchase price, this may actually turn out favorable for the borrower. If the home is a bit cheaper, this may actually allow a borrower to have a small reduction in their monthly payment upon successfully closing on the home!
If the home’s appraisal value does not cause any issues, the appraiser must also confirm if the home satisfies the conditions set by The US Department of Housing and Urban Development in the most recent HUD Handbook. If the verbiage is not on the report, the underwriter will reject the appraisal until that information is there.
If a home does not fulfill the conditions, the appraiser must list the repairs needed and a completion report must be done showing that the aforementioned repairs have been completed with proof.
Homeowner’s Insurance Requirements for the FHA Loan Program
The Homeowner’s Insurance requirements for the FHA Loan program indicates that in order for the loan to be able to be closed, the policy must have the following items:
- Dwelling Coverage to match the loan amount.
- If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
- Named Insured, Property Address, and Mortgagee Clause to match all loan documents.
- The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan. Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.
- Acceptable Deductible
An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowners Insurance Declaration’s Page and Invoice must be provided at closing.
This is because an Evidence of Insurance and other documents have premiums and coverage that can be changed. If the premium increases past what has been previously accepted, this may render the home buyer ineligible for the loan due to debt-to-income ratios.