Water must be on for Fannie Mae to back loan?

17 Replies

Hello all,

I am currently in contract on a HUD home that was not winterized and the utilities are off. There are breaks in the copper piping in the basement so the water cannot be turned on. There are no toilets installed in the home. From the start I asked my local credit union if they would loan on the home without utilities on and they did not mention any issue. Now that the appraisal has come back noting 'no toilets' underwriting is denying the loan. They say it must have at least one 'functional bathroom'. I asked how it can be functional if the water is not on, which I had stated from the beginning.

I already have an estimate to replace the entire plumbing system in the home. Even with the utilities off my appraisal came back 'as-is' at 20% over the contract purchase price. The home exceeds the 2% rule and I don't want to miss out on this purchase. I already have $1200 invested in ernest money, inspections, and appraisals. I asked them if a video inspection of the sanitary sewer lines would suffice, they said no. I asked them if a repair escrow account would suffice, they said no.

As we know I cannot do any work on a hud home until after closing, also hud will not repair a thing. I am stuck here and if a functional bathroom is required then I will lose this house. If it is a requirement then I will be going after the bank to compensate me for funds lost as I stated that the water was off from the start over 2 months ago.

They keep stating that it is a fannie requirement to have a functional bathroom. Is this true? If so can anyone reference where this is stated? I want to say that this is an additional overlay but the loan officer keeps saying that it is required by fannie mae.

Ask the lender if they have a "portfolio" (in house) loan program that would allow you to close on the house, do the repairs and then refinance into a Fannie backed loan.

Underwriters are closing in on the top of my "most hated/annoying" list.

Generally a standard Fannie Mae loan will require the property to be in "livable" condition. If there's anything that would make the property unsafe or unhealthy (like lack of bathroom facilities, running water or electricity) then Fannie Mae will not loan on the property. You can probably get more details on the Fannie Mae website.

The above snip was taken from the fannie faq document which was last updated may 2015. My question is how can I be required to have a 'functional bathroom' if it is not required for the utilities to be on?

....because they require it. Utilities being of does not a non functional bathroom make

Yeah...I'd say a missing toilet and broken water pipes is a much bigger deal than just not having the water turned on.

You're attempting to conflate two issues.

1.  The utilities not being on is one thing.  As noted, that in theory is OK.

2.  The bathrooms not being functional, EVEN IF the utilities are on (as by not having toilets and having broken water supply lines) is something very different.

You asked the lender about #1 and were told it was not a problem.  You don't have grounds to be upset that they won't make the loan now that the issue is #2, something they weren't asked about.

A better headline for your post would have been, "Home must have toilets for Fannie Mae to back loan?"  

Your best bet it so do as David suggests above, and ask for a portfolio loan. Almost all small banks and credit unions offer them, as well as many larger banks. It will probably be a 3/1 ARM.

Originally posted by @Jeff Brower :

The above snip was taken from the fannie faq document which was last updated may 2015. My question is how can I be required to have a 'functional bathroom' if it is not required for the utilities to be on?

 I think you're confusing some of the terminology.

"Habitable" means that a property is capable of being lived in.  Generally, this means that it has a whole roof, exterior walls, running water, electricity and cooking facilities.

"Utilities On" means that you contacted the utility and they turned them on for the inspection.  This is NOT required to close on a Fannie Mae property because there are other ways for the inspector to verify that a system is working other than having the utilities on.  For example, they can run air pressure through a plumbing system and if the system "holds pressure" then it is assumed that it will also hold water.

In your situation, if the plumbing system were otherwise conforming to the definitions of habitability, then Fannie Mae would loan on the property.  However, because the system will not hold pressure (leaking plumbing) and there are no toilets, your house is not habitable.

So the question you've posted above was answered correctly.  Fannie Mae will indeed loan on a property without turning on the utilities.  But the systems do still have to test as habitable.  

Your failing here is in not understanding the difference and asking your question improperly.  Your question should have been "will Fannie Mae loan on a property that does not have a functioning bathroom or plumbing".  The answer to that question is No, it will not.

I think most answers here are missing the fact that this is a HUD home

The answer is unfortunately a FNMA loan was never possible on this property with the issue stated because you do have to have the utilities on for the appraisal and more than likely the Asset Manager was not going to let the water be turned on due to those issues

Any government backed loan is very difficult on A HUD home based on the appraiser needing to have the utilizes on and if the is a deficiency the inability to correct it even if you wanted to as HUD allows no repairs or modifications to the property prior to closing

As mentioned above, I would ask if they have  a portfolio lender or contact a credit union.  You are probably close to needing an extension which would cost you more money so quick action is needed if your are looking to salvage the deal

Just an Idea, You may want to see if your credit union will do a 203k repair loan, I ran into a similar problem with my first HUD Purchase.

Long story short, I was aware of repairs and had the money to make them but couldn't purchase it in that condition .  With the 203K program you will have to get repair estimates from a licensed contractor , then finance this into the loan & have the repairs signed off on.   More "hoops" to jump through but could possibly be a solution. Depending on if the credit union will do a 203K its my understanding not all banks will.

Thanks for the responses everyone. Tavis I don't think they will allow an fha 203k on this one. I already have fha on my personal residence as well. The loan officer did say she would check on an in-house option with her supervisor tomorrow. Only 5% more down, 20% vs 15% on the fannie loan. I will hear tomorrow.

Greg, my current contract is set to expire next Tuesday. They require extensions 5 days in advance of the expiration date so if needed I will need to get my extension filed tomorrow. Pending the in house option approval I may or may not end up cancelling this contract tomorrow.

Thanks again everyone.

@Jeff Brower

Asset Managers are pretty flexible on the 5 days as I have even sent an extension after the expiration date so I would wait until I had a commitment that the loan can get done before I spent more $$

@Jeff Brower

Is the appraisal condition simply stating there are no toilets? If so, I don't think placing a toilet inside the home where the toilet goes is "making a repair" and might be skirting the rules. 

That being said, I'm sure plenty of people would simply put a toilet in place and close the loan. I'm sure the listing agent would even want you to install the toilet, although they would certainly never tell you that.

Now if they're looking for repaired plumbing, etc. - that's another ball game to be discussed. From what you've stated, it seems they simply want to see a toilet in the home. Let us know some more details and/or snap a screen shot of the appraisal.

We purchased a foreclosure last winter and had the same issue. There were broken pipes throughout the house. There was a 50k spread in LTV on a 200k purchase in its "uninhabitable" state. They refused to finance because of the pipes. We wanted the house so we agreed to make the plumbing repairs necessary to do a pressure test. We knew, and signed a statement declaring, that we didn't own the house and were making the repairs knowing that if the sale fell through we would not be compensated for the work done. We paid about $900 and took the risk knowing our credit was excellent and the appraisal would come back fine.

It did take alot of back and forth with the assest manager,  but its worth trying. You'll put in some cash with no guarantee, but if you are confident the loan will be approved you shouldn't be hesitant to do what it takes to close. 

Well I heard back from the bank today. They will not do a fannie loan as anticipated. What they did offer was an in-house option. Not ideal but it will work. 20% down, same interest rate at 5.125% and a 12 year term. The monthly payments vs the 30 year conventional grew from $400 to $550. I had planned to cash out refinance after 12 months anyways so this is not a huge hit. ARV is around 75k and purchase is 43k. Repairs will be ~$7000 so I am still looking fine.

Thanks again everyone for the feedback and suggestions. Hoping to close next Tuesday and get to work on installing those porcelain thrones!

@Jeff Brower

If you're paying for a second appraisal, I would fight for a refund of your first since the lender knew the situation and still sent an appraiser in.

thanks mark but no second appraisal needed. they are sending revised GFE's over tomorrow and I should be good to go.

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