Refinance Damaged Property?

By Gina Pogol
Mortgage Credit Problems Columnist

Becky Asks:  Hi Gina, I am recently divorced and got the house in the settlement. It has a mortgage and an equity loan already and I want to refinance for the amount of
both. The property value has increased enough to cover both, but there is
something that may be a problem. Several years ago the house sustained some
hail damage for which we made a claim and were paid. However my husband took
the check and went on vacation, so the damage was never repaired. There is no
further damage to the house due to this fact, but I'm wondering how this affects
my chances of obtaining new financing. My credit rating is poor as well.

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Gina Says:  I've got a short answer from an expert, and the rest is about 600 pages of FHA regulations that I condensed to one for you. There are two major considerations here--the extent of the property damage (I assume it is habitable) and the extent of your credit damage.

That the insurance money was spent for something other than repairing the property is not a credit problem, says loan authority Peter G. Miller at OurBroker.com. It's a maintenance issue and now a refinancing concern.

If the value of the property has risen sufficiently, it may have enough worth to simply refinance, get cash, and make repairs. However, a more-likely scenario is that if the damage is significant it will be noted by the FHA appraiser and repairs will be required as a condition of the loan--remember that the property is security for the mortgage and the lender wants the property correctly maintained.

If cash is needed for repairs you might consider applying for an FHA loan with x dollars set aside in an escrow (trust) account at closing to assure repairs. Or try a 203(k) plan if really big repairs are required.

Either way, your first stop is going to be an FHA lender.
Lenders must review the appraisal to determine whether the appraiser has reported any property conditions that affect the health and safety of the occupants or the security and the soundness of the property and must require immediate repair where the property condition poses a threat. I have no idea what "hail damage" means in terms of paint protection, structural problems, and safety issues--or if it was just cosmetic--so I'm guessing a bit, but here's a list of what might apply to you:
  • Inadequate access/egress from bedrooms to exterior of home (have any windows or doors been blocked?)
  • Leaking or worn out roofs (if 3 or more layers of shingles on roof are leaking or worn out, all existing shingles must be removed before re-roofing)
  • Evidence of structural problems (such as foundation damage caused by excessive settlement)
  • Defective paint surfaces in homes constructed pre-1978 (was the paint stripped?)
  • Defective exterior paint surfaces in home constructed post-1978 where the finish is otherwise unprotected
  • Evidence of possible structural failure (for example, settlement or bulging foundation wall)

FHA no longer requires repairs for minor cosmetic deficiencies to bring a property into compliance with FHA Minimum Property Requirements. Minor property conditions that no longer require automatic repair for existing properties include, but are not limited to:

  • Missing handrails
  • Cracked or damaged exit doors that are otherwise operable
  • Cracked window glass
  • Defective paint surfaces in homes constructed post 1978
  • Minor plumbing leaks (such as leaky faucets)
  • Defective floor finish or covering (worn through the finish, badly soiled carpeting)
  • Evidence of previous (non-active) wood destroying insect/organism damage where there is no evidence of unrepaired structural damage
  • Rotten or worn out counter tops
  • Damaged plaster, sheet rock, or other wall and ceiling materials in homes constructed post- 1978
  • Poor workmanship
  • Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
  • Crawl space with debris and trash
  • Lack of an all weather driveway surface

Now, if you have a repair that must be completed--that is, the hail damage has created a potentially unsafe condition--you may still be able to obtain refinancing with an FHA rehabilitation loan. The HUD 203(k) program enables the owner to "refinance existing liens secured against the subject property and rehabilitate such a dwelling."

These are pretty complicated. I'd do some shopping but in this case the expertise of your loan officer (and perhaps contractor) plays a much larger part in the success of your refinance than anything else. Good luck and thanks for writing.


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