The unmortgageables

Leaning walls, crumbling foundations 

Before the FHA will sign off on a mortgage, it requires the repair of any structural defect that, without fixing, would leave a house unmarketable. Think of it, the agency says, as "the three S's": safety, security and soundness. 

"If the subject property is in such poor condition that it may be cost-prohibitive or impractical to bring it up to FHA's minimum property requirements, the appraiser should recommend rejecting the property," according to FHA reference information.

Sinking, disintegrating and otherwise failing foundations can be a one-way ticket to mortgage rejection under FHA rules — and for many lenders, says Gloria Shulman, founder of Centek Capital and a Southern California-based mortgage broker.

Nonfunctioning drains or apparent drainage issues also can hurt you, she says. "(This) also includes soil issues as indicated by peripheral walls leaning or collapsing," she says. "This can be a common problem if your house is on the side of a steep hill or in a valley."

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Living near an airport runway

This potential value-killer is not necessarily all about the roar of jet engines rattling a home.

The FHA has one key caveat when it comes to living near a landing and takeoff zone: There must be "evidence of acceptance (of the noise) in the market and (that) use of the dwellings is expected to continue." In other words, the mortgage likely is acceptable if the airport isn't planning on expanding.

Buyers also must receive a "special notification" that the house is in a "runway clear zone," the FHA says. When the loan-application process begins, the would-be buyer must be informed of all implications that come with living near a runway. The buyer then must sign a document acknowledging the receipt of that information. Without these in place, lenders may balk at a deal.

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A leaky roof

Whether you're talking about its walls, floors, windows or doors, homes must be waterproof. That, of course, all begins with the home's topmost layer.

Roofing problems may render a property "uninhabitable," says Brian Capossela, president of Cap Equity Realty in Marina del Rey, Calif.

The FHA, in particular, doesn't want a roof to just block moisture. It asks appraisers to "determine whether deficiencies … do not allow for reasonable future utility," according to agency rules. In other words: It has to last. "The roof should have a remaining physical life of at least two years," the FHA says, adding that it will accept a maximum of three layers of existing roofing. If more than two layers exist and a repair is needed, all of the old roofing must be stripped off.

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Avalanche or mudslide threat

Government lending standards frown on homes facing the threat of a slide.

Federal housing regulations require that residential properties "be free of those foreseeable hazards … which may affect the health and safety of the occupants or the structural soundness of the property. It has been determined that this includes properties in avalanche slide or run-out areas."

The FHA identifies rockslide areas as red or blue zones. Homes located within either color on federal housing maps are ineligible for FHA insurance "and should be rejected" for mortgages, the agency says.

Red zones are swaths of land that have "positive danger and are in the path of a routine slide (less than a 100-year occurrence probability)," FHA rules say. In other words: Those tumbling rocks come down more than once per century. Blue zones are identified as having only the "potential" to suffer a 100-year slide. These areas carry only a "limited probability" that an avalanche will severely damage structures.

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Missing appliances

In an era thick with foreclosures, real-estate professionals may be used to traipsing through distressed properties and seeing that stoves, dishwashers, bathtubs and mounted appliances and fixtures are missing.

In some real-estate-owned properties — homes possessed by a bank, a government agency or a government-loan insurer, typically after an unsuccessful foreclosure auction — "all or some of the appliances may be missing, and there may be damage to the floor, wall or ceiling finish as a result of the removal," says the FHA, which will back loans on these properties, if certain hurdles are cleared. Depending on the scope of the damage, the FHA advises appraisers to note those holes, cracks and gouges as "deferred maintenance" and make sure the house is devalued appropriately.

When it comes to obtaining a mortgage from a private lender, "a missing stove won't fly," says Matt Martin, president and chief executive officer of Matt Martin Real Estate Management in Arlington, Va.  Lenders require that homes be in livable condition. Residents must be able to cook, drink water, wash and stay warm. If that's not possible, it must be remedied before a loan is issued.

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Security bars over the windows

This look of iron slats covering glass just screams: "Bad neighborhood!"

But it's not the intimidating, jaillike appearance that can scare off loan underwriters.

"Properties with security bars will be considered unacceptable unless they comply with local fire codes by having a 'quick release' on at least one window in each bedroom," says Michael Most, senior mortgage consultant at City Home Loans in New York City.

"Or, all bedrooms must have adequate egress to the exterior of the home," Most says. "Occupants of a bedroom must be able to get outside the home if there is a fire."

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Unheated rooms

All habitable rooms must have a heat source, the FHA says in its rules.

"This does not mean that each room must contain a heating device but that each room must receive sufficient heat," the FHA says.

There are, however, a handful of geographic exceptions: homes in Hawaii and the Florida counties of Lee, Charlotte, Glades, Hendry, Palm Beach, Collier, Broward, Monroe and Miami-Dade don't require heat if the lack of a furnace is normal for the local housing market and doesn't hurt the property's marketability, the FHA says.

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Lava flows

Given that thousands of American homes are in the Hawaiian islands, FHA mortgage rules include the threat of red-hot lava there.

Federal housing policies on volcanic hazards were established in 1971 and include boundaries for two specific areas on Hawaii's big island that may be in lava's path. The FHA will not back loans in these zones.

Zone No. 1 includes the summit areas and active parts of the rift zones of Kilauea, a volcano on the southeastern side of the island, and Mauna Loa, a volcano on the southern end of the island. Zone No. 2 includes several areas adjacent to and down-slope from the active rift zones of those two volcanoes.

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Underground oil tanks and wells

Whether they are still operating or long-since abandoned, fuel tanks and wells buried below a residential property could derail a mortgage loan if they are detected or noted in property records, Martin says.

HUD's policies on subterranean oil- and gas-storage tanks and wells point out that they pose potential hazards via fire, explosion and ground pollution. "Therefore, no dwelling may be located closer than 300 feet from an active or planned drilling site or 75 feet from an operating well," the FHA says. "This applies to the (home's) site boundary, not to the actual well location."

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Termites

Wood-chomping bugs can gobble walls, ceilings and a home's chances of qualifying for a mortgage, real-estate experts say. 

FHA documents (PDF) say termites "can cause serious problems in the wood structural components of a house and may go undetected for a long period of time." However, the agency requires inspection only if there is evidence of "active infestation" and if these inspections are mandated by the government in the state or municipality where the lender is located.

As a suggestion to local and regional appraisers, federal housing authorities have designated two "termite infestation probability zones."

The first — a swath of "very heavy" termite infestation — includes Alabama, Florida, Georgia, Mississippi, South Carolina and Puerto Rico. The second, classified as having "moderate to heavy" termite activity, includes Illinois, Indiana, Kentucky, North Carolina and Tennessee.

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