FHA 203k Standard Loan and Lead Based Paint

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FHA 203k Standard Loan and Lead Based Paint

Andrew GriffinPro Member
Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote

I'm buying an old duplex built well before 1978. It's not a HUD Home. My financing is FHA 203k Standard Rehab loan. The plan is to do rehab throughout the property. It has chipping paint around the exterior of windows and possibly other areas in the home that the appraiser called out as possible lead-based paint. The lender is inexperienced with this type of loan and has asked me to jump through additional hoops along the way. Now they believe that I am required by FHA to get a lead-based paint inspection and they only just told me this right before closing. I called around this seems to be an odd request even for an old home that is getting an FHA or FHA backed loan. The house is old and surely has old lead paint somewhere. I have a feeling that if I pay for an inspection that they will only confirm this fact then it will hold up the process more and I'll have to get a follow-up risk assessment, then abatement ect. My seller wants to back out the deal but I'm trying to put together a gameplan to save it.

What should I do? I read that for HUD Homes, HUD automatically inspects and pays up to $4k or $5k for lead-based paint "stabilization" in homes older than 1978 that use FHA loans. Will HUD have my FHA-financed home inspected and treated even though it is not a HUD Home? Or is it my responsibility?

Please Help!

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Daniella Sanchez
Real Estate Broker · Melrose Park · Member since 2015 · 68 posts · 44 votes
7y

The first house I purchased was built in 1955 and I was the second owner so I knew LBP would be found and require correction before closing (I also had an FHA loan). To keep things moving along I asked the sellers if I could paint the property myself prior to inspection to avoid any road bumps. They said yes and when the inspector/appraiser came nothing about LBP was noted.

I understand this is a risk and I could have been out of pocket about $80 but I was sincere with the sellers and we worked together to get the deal closed even though I was purchasing AS IS. 

Also, it's important to know that LBP is not recognized if a coat of fresh or newer paint is applied over it. If it's covered there's not much to worry about. 

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  • Daniella Sanchez
    Real Estate Broker · Melrose Park · Member since 2015 · 68 posts · 44 votes
    7y

    The first house I purchased was built in 1955 and I was the second owner so I knew LBP would be found and require correction before closing (I also had an FHA loan). To keep things moving along I asked the sellers if I could paint the property myself prior to inspection to avoid any road bumps. They said yes and when the inspector/appraiser came nothing about LBP was noted.

    I understand this is a risk and I could have been out of pocket about $80 but I was sincere with the sellers and we worked together to get the deal closed even though I was purchasing AS IS. 

    Also, it's important to know that LBP is not recognized if a coat of fresh or newer paint is applied over it. If it's covered there's not much to worry about. 

    2Reply
  • Andrew GriffinPro Member
    OP
    Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote
    7y

    @Daniella Sanchez If only I had known that sooner!!

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  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    7y

    HUD will not have this property inspected because you are not buying a property owned by HUD. This is your responsibility.

    Lenders are allowed require items to be completed even if HUD/FHA do not require them.

    According to HUD guidelines, If the Property was built before 1978, a U.S. Environmental Protection Agency (EPA) or state-certified lead-safe renovation contractor must be
    used for the painting work; machine sanding and use of propane or gasoline torches (open-flame methods) are not permitted, and just washing and repainting without
    thorough removal or covering with siding does not constitute adequate treatment. All defective (cracking, scaling, chipping, peeling, loose, or
    flaking paint and paint that is to be disturbed by this Painting (Exterior) point or other points in the Work Write-Up must be scraped, primed and double coated. Because of
    the concern for lead paint ingestion, all peeling paint conditions must include scraping, priming and double coating of surface areas. If the Property was built before
    1978, paint mitigation must be in compliance with EPA’s Renovation, Repair, and Painting Rule and HUD’s lead-based paint regulations regarding paint mitigation at 24 CFR 200.810(c). Some states may require more specific treatment.

    The Lender may release funds for lead-based paint stabilization only when a state- or EPA-certified lead-based paint inspector, certified risk assessor or sampling technician, independent of the firm that performed the stabilization,
    performs the clearance examination and clearance is obtained.

    Hope this helps! 

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  • Andrew GriffinPro Member
    OP
    Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote
    7y
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  • Andrew GriffinPro Member
    OP
    Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote
    7y

    @Paul Welden Thanks for that explanation! The way I am going to fight this is that the lender already admitted that they are just going by what the appraiser is requesting. The lender did not tell me about this requirement upfront or give me a reasonable time to accomplish it before closing. That further verifies that this is not a typical lender overlay because the lender already was aware I'm applying for an FHA backed loan and that the house was old.

    The appraiser did not note any defective paint areas that would need to be addressed. He based the inspection required solely under the pretense that "All properties built prior to 1978 will require a lead base paint inspection and possible stabilization if FHA financing is used."

    Although I'm new to this, most inspectors have told me that they never see that requirement. The HUD guidance I found online specifically states that 203(k) is a mortgage insurance program only because FHA is not providing the rehab dollars and should be treated just like any other FHA backed mortgage and refers to 24 CFR 200.810(c) which does not require a lead-based paint inspection.

    If FHA, the lender, Indiana, EPA, ect. do not require it, what legs does the appraiser have to stand on? I think what he may have done is try to justify singling out the 203(k) but he should not be able to do that. Therefore, I'm challenging his reasoning and will let everyone know the outcome.

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  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    7y

    You mentioned earlier that your lender is inexperienced with 203k's. Unfortunately, this is not good for you. However, if the lender requires any type of inspections or paperwork for any reason (not discriminatory reasons), then the lender can require and you will need to comply. 

    Most likely, your selected lender is a mortgage broker who is NOT directly funding this loan and has a larger lender on the backend calling the shots.

    If the appraiser requires an inspection, then the lender will require it. Challenging it will most likely delay the closing and could have negative consequences. You'd most likely have to get the appraiser to remove that verbiage from their report (good luck) and then have the lender approve that modification. 

    Just do the LBP inspection and get on with it. By the time you go through your challenge demonstration, you could have had the LBP inspection/testing done!

    You selected this lender who had no or little 203k experience and now you have to endure the consequences of that decision. 

    Did the 203k Consultant's report state anything about doing/requiring a LBP inspection/test?


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  • Andrew GriffinPro Member
    OP
    Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote
    7y

    @Paul Welden That's unfortunate. The loan officer talked up the lender as if they had experience with the 203(k). I didn't do my due diligence on the company.

    Lead-Based Paint Inspections are pricey in my area and I'm looking at an additional 3-4 weeks to account for the appointment and results, at least. My seller is not going to give me that kind of time so I'm in-between a rock and a hard place. Not to mention additional costs that may be added to my budget. The appraisal already came back very low and I had to cut my rehab budget so much that it can't take another hit.

    No, the 203k consultant said that he wouldn't mention lead specifically but we discussed scraping and re-painting certain areas and added it to the budget. He actually has been silent since I've asked him is this really normal for an FHA backed loan.

    I feel that I'm forced to challenge it.

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    @Andrew Griffin 203k loans are difficult enough for people experienced to navigate. Couldn’t imagine going through the process with a lender who isn’t familiar.

    Is the window replacement included in your scope of work? If so, and you replace them first thing after closing that may be a solution. One of my clients in the same spot did that and the lender was ok with that.

    If it isn’t included in your budget would your numbers still work with it added?

    1Reply
  • Nicole Heasley Beitenman
    Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Are you working with an agent? 

    1Reply
  • Noreen Eddy
    Investor · Bergen County, NJ · Member since 2016 · 40 posts · 24 votes
    7y

    We had a HUD FHA 203k house - the lender requirement was ONLY paint that was chipped, cracked, or peeling. So, don't test the paint that isn't damaged. After that, if I were you, I'd test it ASAP and forget the runaround - if you plan on renting or selling later, you'll need to prove that the house was abated or whatever from all LBP.

    Yes our FHA 203k did reimburse the cost of LBP abatement - somewhere along the way Sage Acquisitions changed its mind on the number by $500 though, even though they're the ones that produced and signed the document. If I were you, I wouldn't mess around with FHA too much - if it's a really good deal, and it sounds like it is, then do what you need to do to get the house into your hands as fast as possible, and leave the inexperienced lender / FHA / 203k folks in the dust.

    1Reply
  • Derreck WellsPro Member
    Specialist · Pelham, NH · Member since 2013 · 547 posts · 269 votes
    7y

    @Daniella Sanchez You are 100% wrong. It doesn't matter how many coats of paint are over lead paint, it will always be detected during a Lead Inspection. They use an x-ray gun that goes through ALL layers of paint to the wood. Even the old method, they had to cut a notch through the paint to the wood so all the layers were exposed. 

    You did not have a Lead Inspection done on your property. HUD doesn't do lead inspections, they look for code or health violations.

    1Reply
  • Andrew GriffinPro Member
    OP
    Investor · Indianapolis, IN · Member since 2015 · 14 posts · 1 vote
    7y

    Thanks for the feedback everyone!

    Just to give everyone an update, evidently the lender does have some success with 203k. My situation might have gone arry when my original loan officer left the company shortly after I was approved. The lender stuck me with a loan officer who seems inexperienced and not able to tell me much about the process.

    What I found out is that the lender will require a lead-based paint inspection BEFORE closing and Might even require me to stabilize any lead-based paint findings BEFORE closing. It has taken days to only get partial answers to my question. I asked them to assume that the property likely has lead throughout the interior and exterior and let me know what I need to do from there. The underwriter is not comfortable with doing that. They want to confirm the findings first. They have not been able to give me a complete gameplan for what happens if lead is found even though they knew my scope of work prior to the appraisal. I did confirm from a lead-based paint inspector that they will detect the presence of lead under any amount of new paint so @Derreck Wells you're right about that. @Noreen Eddy I considered just trying to buy the property with a conventional but I won't get to do the repairs needed so I'm going to pass on this one rather than trying to figure out a new way to get it done.

    My team was proactive enough to include scraping/repainting the exterior trim on the windows that we noticed were chipping. We also know that we will be disturbing paint. patching and repainting plaster on many of the interior walls so that we can update knob and tube electrical to current standards. We have contractors on the team that are certified to handle lbp renovations.

    Later, I found out that someone I actually know recently got an FHA 203k from the same lender but they were allowed to do a lead-based paint inspection after closing. From this ordeal, I've learned that lenders/underwriters do not necessarily follow set standards for each project and their word is final.

    @Paul Welden was kind enough to share his knowledge and connect me with other lenders. For now, that deal is dead. There are too many what-ifs to justify pursuing it further. Paul also confirmed that once an appraisal report is generated, it becomes The only valid FHA appraisal for that property for 120 days. Any FHA borrower will be required to use that appraisal report for 120 days (not applicable to any other loan such as conventional, VA, USDA, etc.)

    I'm going to take a look at another lender and a different property. If I have success I'll definitely share the lender information!

    0Reply
  • Noreen Eddy
    Investor · Bergen County, NJ · Member since 2016 · 40 posts · 24 votes
    7y

    "From this ordeal, I've learned that lenders/underwriters do not necessarily follow set standards for each project and their word is final."

    Exactly.

    Best of luck!! Good for you for keepin' on!   You'll get your property, just keep moving forward!

    1Reply
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