Minimum Property Standards For Fannie Mae & Freddie Mac Loans

by | Mar 13, 2020

We often get questions about just how beat up is too beat up to get a normal Fannie Mae / Freddie type loan on a property, and thus avoid hard money. The general rule of thumb is that the property must be a complete and functional house and absent any flagrant health or safety issues.

Often the ones that are the best value for the price are “grandma/grandpa houses.”

These properties are often characterized by one or more of the following:

  • One spouse has passed away; the surviving spouse has neglected to maintain the property.
  • The house is complete and functional – grandma has been living there, after all – but is in a condition best described as “gross.” The oven hasn’t been cleaned in years, but it still works. The walls are yellow with cigarette smoke, but they’re structurally sound. The refrigerator is from the 1970s, very loud, and presumably very energy inefficient. And so on.
  • Often times the surviving grandparent, and/or their kids, grandkids, or other heirs, are either unwilling or unable to invest the capital to make the property “turnkey.” Investors often correctly see this as a great value-add opportunity.
  • Unpermitted work. Specifically in the SF East Bay area, it’s often the case that permits are not needed for improvements that were historically done to the property. In such cases, if the work was done reasonably well, the appraiser will comment that the work “appears to have been done in a workmanlike manner” and it’s simply a non-issue. Note that this is regional: things that may be flagged as issues in Los Angeles will be perfectly acceptable in Oakland or Vallejo. This is not “official” but is what we see on the ground.

Note a few things:

  • Generally, purely cosmetic issues will not interfere with your ability to finance a property using Agency financing.
  • Sometimes when a home isn’t quite up to par, it can make sense to implement temporary fixes for minor issues.. For example: if the home lacks an oven, it’s more cost effective to buy one off of craigslist and install it at the property than it would be to take out a hard money loan at 13% interest rate and 3 discount points.
  • For bank-owned properties, the bank will generally not give a buyer permission to make any changes or improvements to the property prior to the close of escrow.

The ultimate price of a definitive answer is going into escrow on the property and ordering an appraisal. In such cases, it’s best to have all contingencies in place. If you have any questions about obtaining a mortgage in California, or a scenario that you’d like to go over, please call Chris Mason at (415) 846-9211 or schedule a free 30 minute consultation using our online form.

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