This is a guest post from Steven Laszlo (S0640), FHA 203k consultant and a trained home inspector in California. We asked Steven if we could put this on our site because this question comes up all the time from home buyers, Realtors and even other loan officers when we train them. Its an important subject that really could use some clarification. So here you go!
How Do HUD 203k Inspections Differ from Standard Home Inspections?
When homeowners ask us if our inspection as a 203k loan consultant can take the place of a standard home inspection, we usually tell them that is does not. There are several reasons it doesn’t, but the main one is because the two inspections have two different purposes.
We are trained home inspectors with many years of experience and thousands of inspections completed. In our capacity as a HUD 203k consultant, when we go out to a house to assess it for a homeowner who is considering borrowing funds under the 203k loan program, our inspection has a very specific focus. Our main goal is to inspect the property to see if it meets the “Minimum Property Standards” as set forth by HUD.
HUD’s “Minimum Property Standards” are found in their manuals online and are an extensive compilation of criteria that applies to things such as, construction and material standards, safety and health requirements, compliance with local codes and access requirements for handicapped and the elderly for their housing. The main area of the HUD Standards that applies to the 203k loan program has to do with health and safety and the longevity of the building throughout the life of the loan.
FHA insures the 203k loan and before they take that risk, they want to make sure that the property meets their standards so their investment will be preserved. Although a homeowner may borrow funds to remodel their kitchen or bathroom, or to build an addition, HUD will still require the loan to include budget items to cover repairs to bring the property up to their standards. The kinds of items they want to see present, or upgraded if deficient, are things such as a good quality roof, a solid and stable foundation, functional and intact structure, functional doors and windows and a general state of function and good repair of house as a whole.
From and health and safety perspective, the property needs to have potable and hot water, functional sewage system and a functional and sound plumbing system. Bathroom and kitchen facilities need to be in good repair, not too aged and serving their intended purpose. Heating, and cooling where appropriate for the climate, are major safety concerns and no house can be without these systems. A sound and functioning electrical system that is safe and without issues is also important and required. To an extent, the consultant is looking out for FHA’s best interest in terms of the loan, but by doing so, he is also looking out for the homeowner’s interest.
Contrast this to the standard home inspection where the inspector is hired by and works purely for the homeowner or homebuyer. A home inspector has a different set of standards he works from such as the California Real Estate Inspection Association Standards (CREIA), The American Society of Home Inspectors (ASHI), or International Standards of Practice for Performing a General Home Inspection, through The International Association of Certified Home Inspectors (InterNACHI).
The various standards by which a home inspector conducts his inspection can be much more rigorous than the HUD Standards. Certainly there is overlap between to the two, however a home inspector will do a much more detailed and exhaustive inspection, followed up by an itemized inspection report. This is great for the homeowner as he can have an itemized list of every little thing that is wrong with his house. The inspection report generated by the HUD 203k consultant is mainly for his use only to compile a budget and have a record of what he saw while inspecting the property. It is not usually forwarded to the homeowner for his review or records. Another very important thing to keep in mind is that home inspectors typically carry errors and omissions insurance that will cover them in case they miss large and costly repair items. Their main purpose is the find out everything they can, given the limits of a visual inspection, that is going on with the house. They will comment all items, whether they are in acceptable condition or not. An experienced home inspector will generate a very thorough report that can be relied upon for accuracy, future repairs and as a resource of valuable information about the house.
A full-scale, extensive home inspection can cover many things such as the general home inspection, sewer main line inspection, chimney inspection, mold inspection and termite and pest inspection. Having these different experts assess the condition of the property from their perspective only helps a homeowner get fully informed and know exactly what he is getting into when buying a house. When refinancing a house, these inspections may not be necessary as the homeowner would already be familiar with the issues concerning his house.
The 203k loan can be used when buying a house and also for refinancing. We recommend that a homebuyer take advantage of the various specialty inspections when buying so he understands his purchase very thoroughly. A HUD 203k consultant inspection will not get into any of these specialty inspections as they require the expertise of numerous trained persons. It is certainly in the best interest of the homeowner to understand these differences and what they address so he can make the most informed decision possible.
When using the 203k loan program for refinancing, it will be the homeowner’s choice whether or not he wants to have specialty inspections. There is no requirement from HUD that he does so other than the inspection done by the consultant. Certainly if he wants the information and the understanding it would be his choice.
However, the homeowner needs to understand the HUD 203k consultant inspection does not take the place of a thorough inspection by a qualified home inspector.