“The FHA makes sure the house is valued correctly and that it is sound before they insure the mortgage.” Since FHA requires a property appraisal and they say that homes must meet the minimum property requirements of the FHA. Homebuyers and even some real estate agents believe there are assurances from the FHA that the values are protected and the loan is good. It is a reasonable assumption.
The TRUTH--FHA guarantees the loan but does not guarantee the value or condition of a home. FHA appraisals and property requirements are intended to protect the FHA, not the homebuyer.
For the past 11 years, since 2000, all homebuyers must sign a statement to acknowledge that the FHA DOES NOT WARRANT THE CONDITION OF THE HOUSE.
The assumption that FHA would protect the homebuyer is reasonable. FHA requires a property appraisal, and that homes meet certain "minimum property requirements". That these are designed to protect FHA rather than the homebuyer is a subtle distinction that is lost on many homebuyers.
The problem took a turn for the worse in 1999 when FHA adopted a new set of rules regarding appraisals that it trumpeted as a triumph for consumer protection. The agency described the new program on its web site as follows.
"We are offering FHA homebuyers the best protection against bad appraisals ever available in the public or private sector. The new appraisal system we are establishing creates a new level of consumer confidence in the home buying process. It answers the two biggest questions facing most homebuyers: Is the house I want to buy worth the sale price? Is the house in good condition?
The Homebuyer Protection plan that HUD is implementing to cover all homes purchased with FHA-insured mortgages will:
Require a more thorough basic survey of the physical condition of the home to uncover potential problems in a home.
For the first time require that home defects found by appraisers be disclosed to potential buyers.
Impose stricter accountability on all appraisers and tougher sanctions on those who act improperly - ranging from barring them from doing more FHA appraisals to steep fines and potential prison sentences in the most extreme cases…"
But one must read further. Elsewhere on its site, FHA says:
The appraisal is performed for the use and benefit of HUD, and the lender involved in an FHA transaction… HUD/FHA MAKES NO WARRANTIES AS TO THE VALUE AND/OR CONDITION OF ANY FHA-APPRAISED PROPERTY, therefore buyers/borrowers must determine for themselves that the price of the property is "reasonable" and that it's condition is "acceptable"…
Borrowers should be encouraged to obtain a detailed home inspection of the property. Borrowers should complete sufficient research of home inspector’s qualifications and designations to ascertain that they feel comfortable with the individual they hire. HUD does not maintain lists of approved Home Inspectors.
In other words, FHA has this great program for protecting consumers, but don’t expect it to assume any responsibility.
