A guy wants to sell, but his central system is broken, so he has space heaters in each room. Does that work? Is it going to fly for a loan? What’s an appraiser going to be looking for when it comes to a heat source? Let’s consider some thoughts from Fannie Mae, HUD, local code, and different lenders.
First, as a quick refresher, appraisers are required during a loan to list what type of heat source is present. Appraisers typically turn on the heater during a FHA or VA transaction to be sure it is working, whereas that is not usually required during conventional financing (sometimes it is).
1) FHA
Quick FHA summary: In short, the heat source needs to be able to heat the house to 50 degrees at minimum and it should be automatic. The word “automatic” means it needs to work without someone making it work for an extended period of time. A plug-in space heater isn’t going to cut it because it can’t heat the entire house. Likewise, it’s not going to work for an owner to say, “My central system went out, but I have a fireplace, so we’re all good.” Nope.
Straight from FHA: FHA/HUD 4000.1 (Page 518) states “The Appraiser must examine the heating system to determine if it is adequate for healthful and comfortable living conditions, regardless of design, fuel or heat source. The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the permanently installed heating system does not:
• automatically heat the living areas of the house to a minimum of 50 degrees F;
• provide healthful and comfortable heat or is not safe to operate;
• rely on a fuel source that is readily obtainable in the subject’s geographic area;
• have market acceptance within the subject’s marketplace; and
• operate without human intervention for extended periods of time.”
2) FANNIE MAE
Quick Fannie Mae summary: Fannie talks about how heating and other improvements need to conform to the neighborhood and have market acceptance. This means one dude might be fine with a plug-in space heater or his boy scout fire-starting skills, but that’s probably not acceptable in the market. See #4 below with some more thoughts about lenders and Fannie Mae.
Straight from Fannie Mae: B4-1.3-0.5 states, “The improvements should conform to the neighborhood in terms of age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood or with the requirements of the competitive market because of adequacy of plumbing, heating, or electrical services; design; quality; size; condition; or any other reason directly related to market demand, the appraiser must address the impact to the value and marketability of the subject property.
3) LOCAL CODE & ADVICE
Local code: Standards from Fannie Mae and HUD are really important, but we also have to know the local market. For instance, Sacramento County does NOT allow portable space heaters as the main heat source (I’m guessing most areas are like this). There are also requirements for temperature, so if a wall heater, central system, or baseboard system can meet those requirements, then you’re all good.
Practical Advice: If you have a broken system and you’re planning to install a heater that is less traditional, I recommend talking with your loan officer to be sure the underwriter is going to sign off. If an appraiser has already visited the home, you can ask the appraiser what type of systems tend to be acceptable in the market too. Keep in mind appraisers aren’t building inspectors, so they’re probably not going to give specific advice such as the number of baseboard heaters needed to meet code (ask the building department). Also, if you’re wanting to use an alternative type of heat that is technically code compliant but not really used in the market, I’d strongly recommend you talk with your loan officer and appraiser first.
Straight from Sacramento County Code: “When the winter design temperature in Table R301.2(1) of the 2010 CRC is below 60*F (16*C) every dwelling unit shall be provided with heating facilities capable of maintaining a minimum room temperature of 68*F (20*C) at a point 3 feet above the floor and 2 feet from exterior walls in all habitable rooms at the design temperature. The installation of one or more portable space heaters shall not be used to achieve compliance with.”
4) DIFFERENT RULES:
Real estate is hardly ever black and white, which means a strict rule in one place might not necessarily apply to every location or with every lender either. Thus we might see a rural home with nothing but a pellet stove obtain financing because it’s common for that market (which an appraiser would know). But it would be a marketability issue if we saw a house with a pellet stove (and no other system) in a suburban tract neighborhood where everything else has a central system. In that case I imagine most lenders would require a type of heat source that is common for the suburban tract market.
I asked Matt Gouge, a loan officer, to pitch in some thoughts from the perspective of Mountain West Financial:
Freddie and FNMA do not have any specific guides in reference to a properties’ heat source. The main guide FNMA references in their selling guide is B2-3-01 General Property Eligibility. The key is that the home is safe, sound and structurally secure and suitable for year-round use. The requirement of a permanent heat source can vary from lender to lender and geographic locations. A general guide followed by most lenders in the local area defines a permanent heat source as a heating unit appropriate for the GLA of the dwelling, hard-wired into the electrical system of the home and thermostatically controlled. Baseboard heat would be acceptable but must be hard-wired and thermostatically controlled, and it has to produce the appropriate amount of heat for the gross area of the living space. A portable type of heater, a wood burning or pellet stove are not considered a permanent heat source.
I know it’s frustrating to talk about rules that don’t apply everywhere, but then again real estate is not the same for every location, climate, bank, etc… So the rules aren’t always the same either.
I hope that was interesting or helpful.
Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.
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Great refresher and resource to check if we’re not sure about if heat sources meeting typical lending and appraisal standards. Thank you Ryan.
Thank you Gary. I appreciate it. It’s good to remember this stuff and think through it.
In CA heating is required, without heating the home is not considered habitable.
Hi Tom. Thank you. I agree. Heat is a big deal here – especially for landlords who are expected to provide heat to their tenants. Some appraiser colleagues have remarked that heat is not required in their market, but I’ve never seen that in California or met a lender who has accepted a home without heat. Granted, maybe there is some funky nonconforming property built into the side of a hill or underground that would break the rules, but otherwise I’ve not seen it. I’m open ears though if someone has a story.
Ryan, this seems to be a common question no matter where you are. I get people calling me all the time to see if a window unit is sufficient, which of course it is not. It’s interesting to see the very specific guidelines published by your Sacramento county code.
Thanks Tom. Yeah, we have to be in tune with what code says and what’s expected. I find it’s easy to just say, “Well, a permanent system is needed” without thinking through the fine print of various entities. On one hand there are some black and white rules, though on the other hand there is gray. Sounds a bit like life… 🙂
Great article! I find it interesting that a heating system would need to heat a home to 50 degrees to be acceptable……whose great idea was that? Ever try to live in a home where the temperature is 50 degrees? Not in this market:-)
Thanks TJ. I hear you. Whenever my family is out of town and comes back to the house in the winter, it’s often about 55 degrees inside since the heater has been off for days. That doesn’t cut it. I wonder if part of HUD’s reasoning is to make it easy for more homes (and Borrowers) to qualify for FHA financing. That’s a total guess and probably has nothing to do with it, but I wonder. Sacramento County rules are much more stringent and have mandates closer to room temperature.
that 50 degree amount is generally considered especially in the mtns a temp that keeps pipes from freezing irregardless of the comfort of the occupants.
Great point. Thanks Mark.
Okay I will admit I found this whole post hilarious. Well done!! You always come at these issues from such a creative angle, I often recommend new home owners or those shopping to read your blog. An issue related to this (a little) that I always find interesting is: whose responsibility is it to advertise these sorts of requirements to home buyers? I feel that local municipalities and mortgage lenders could both be doing more to be transparent and clear.
Thank you so much. I appreciate the kind words and I’m glad it’s somewhat entertaining too. 🙂
It’s hard to say who has the responsibility here, though I think it’s maybe a few groups. There is certainly common knowledge, so to a certain extent buyers are probably informed about some of the basics just because they have a pulse and they’re paying attention. On that note buyers definitely have a responsibility to pay close attention in a transaction, learn, and maybe even read the reports (like appraisals, home inspections, pest reports, etc…). One of the problems in the marketplace is there is so much information though, so nobody really reads. Of course the agent and loan officer have a huge responsibility in helping to direct the buyer to understand how things work and maybe even what properties might qualify or not for certain types of loans. Thus buyers ought to be able to rely on the agent and loan officer for their expertise. On the other hand there are some things that will only be learned by diving in and letting a transaction unfold. Truth be told even real estate professionals (myself included) learn new things all the time because we encounter stuff we haven’t seen before. Thus there is an element of the unknown here for everyone in the transaction if we’re honest. In that regard it’s a fun ride for everyone and we have to ride the wave that comes.
As previously stated-ask your lender. If you do any work in rural areas-pellet stoves are common. I had a lender require a pellet stove instead of wood stove-but it had to have an auto-feed hopper of a certain size.
YMMV
Sage advice. Talk to the lender. I hope that point is coming across very clearly. Real estate dynamics are not the same everywhere, so the rules won’t always be the same. That’s interesting to hear about the pellet stove being required. I don’t work in the rural market, so that’s insightful. Thanks Mark.
Ryan:
Another good article congrats.
With FHA, AND VA requiring more in depth inspections.
I have yet to meet an inspector or an appraiser who correctly measure the temperature in a home (3′ from the floor and 2′ from the wall). Inspectors do carry digital thermometers and typically only measure the air temperature from the vents. I have never seen an appraiser with a thermometer, if an appraiser turns on the system for 5-10 minutes I would be amazed. I don’t even see FHA appraisers turn on appliances or flip on lights. I questioned one appraiser who stated he did not have time. This appraiser would go out in the field and blow through 4 or more inspections in a day then stay home and do the reports.
Without there being monitoring in the field, these practices will continue and the looser is the buyer followed by the lender.
BTW I do carry a digital thermometer, $10 at Harbor Freight and it only comes out when my hands are turning blue. I do not do FHA or VA appraisals.
Thanks Tom. You may be right about some hastiness on inspections unfortunately. If an appraiser is too busy to test the systems, then that appraiser probably shouldn’t be doing the assignment. Hopefully most appraisers are turning on systems enough to assess enough if the heater is working. If hot air is blowing, most appraisers would call that working and leave it at that. I don’t know that FHA would require an appraiser to test the heat at 3′ from the floor and such.
Thanks for the pro tip on the thermometer. Harbor Freight is perfect for that kind of stuff.
Ryan,
Great post as usual! Let me throw out a scenario I ran into:
This was a conventional loan on a 1920 bungalow with a forced air gas furnace that worked well. However, the finished attic offered no vents. Instead, they employed a thermostat controlled electric fireplace that is capable of heating the area.
Since it plugged into a wall outlet, it wouldn’t be considered permanent, but it is thermostatically controlled and heats the area. There are no pipes or bathroom in the finished attic.
I pondered over whether to call for a hardwired, permanently attached unit, but opted to narrate the situation and stated that it appeared to do the job. Any thoughts?
Jim
Thanks Jim. I appreciate the kind words and the excellent example. I don’t know what would be legit in the eyes of local code in a situation like this. I would definitely want to be in tune with code and then explain what is there and not there in my report. Though in some senses I think standing back and remembering our role is critical. We are there to render value. If this is not a big deal for the market, it would be silly to have to make it a big deal for the value. I don’t say this to minimize the issue, but part of me despises how technical we have to be at times because of lending standards. I know that sounds ironic coming from a guy who just wrote a post on the nitty gritty of heat rules. But in a case like this if we have compelling evidence that the market considers it square footage (and heat is adequate), it’s hard to come in with red tape and ignore the area as square footage. I still don’t like the idea of this being a plug-in though and I would address it. I would like to consider the heat source in the rest of the house and whether it was adequate to heat the entire house too. I would feel much better about this plug-in if the heat from the rest of the house was doing a pretty good job. I’m with you in that we have to struggle sometimes with lender standards. At times we will have to make a judgment call, but definitely explain our reasoning without hiding anything either. I don’t think I would fault an appraiser either way here to be honest. I’d be most interested in the appraiser interacting with the standards, keeping conversation open with the lender, and coming to an informed and well-reasoned decision. In some cases if this was for a loan, the lender would simply be the decision maker. I know I would bounce the liability ball to the lender and say, “How would you like for me to handle this?” If this was a private appraisal I wouldn’t have that luxury, so I’d simply explain the issue and probably not make a big deal out of it unless I felt it was a huge deal in the market. Ideally I’d have a couple of previous sales though to show me if it was a big deal in the market or not.
I recall a local agent sharing a situation where there was an attic but no direct heat source there. The appraiser did not consider any of it as square footage. On one hand I get it, but on the other hand I wonder if the market recognized it as square footage. I wonder too if the reduction in value from less square footage was similar to the cost to add the heat source.
Great article and info as always Ryan. It’s a great idea to have lender partners that can give insight into HOW they interpret the guidelines we all follow. While some may underwrite directly to Fannie, Freddie, HUD guides we are all known to have a few overlays in different areas. Having discussed different scenarios with lender friends at other institutions I can also tell you that different lenders may also INPREPRET the same guideline differently. If anyone has any questions for me I am happy to chat. My website link is in the article but my direct line is 916-529-7600
Thanks Matt. I appreciate you. Key point on having a different interpretation too. As much as we’d like to think real estate is black and white, it’s really not.
Good article and references.
I just wish the powers that be were broader minded and would consider that blanket pronouncements do not consider many factors. In Texas we have more deaths related to heat and a lack of air conditioning. I realize pipes cannot overheat and damage the structure but the majority of the reasoning for the minimum standards and codes is health not structural soundness.
Thank you Sheron. I agree with you that health is the backbone of the standards. AC is usually not required for a loan. I can see where not having it could be a personal safety issue during severe heat waves – especially for the elderly.
I’m a realtor in Florida and just showed a house built in 1965 that has radiant ceiling heat. First time I’ve seen this. My buyer in thinking about making an offer, but we were wondering if this type of heat would be an issue with FHA.
Hi Linda. Thanks so much for the comment. This type of system should not be a struggle so long as it heats the house adequately as listed above and has market acceptance. In my area I would have no problem at all with a heat system like this. It’s not too common, but it’s not a negative issue for marketability that I’ve ever observed though. Hope that helps.
Hey Linda,
In Oregon, ceiling heat was pretty common around the 70’s. It shouldn’t be an issue in Florida. During the winter, it’s easy to identify the homes with ceiling heat in this area. Roof frosty = probably not ceiling heat. Roof dry = probably ceiling heat. In a colder climate you can almost see the energy $$$$ float off into sky.
Jim
Thanks Jim. I love the roof test.
i am under contract on a 1940s home, that has window units for air and dearborn heaters for heat. The appraisal came back saying that the Window units were ok as long as they were not attached by an extension cord. If we got Window A/C Heat combo units would this satisfy the requirement?
Hi Elizabeth. Thanks for the comment. Technically AC is not needed for a loan, so that’s not really an issue. Well, unless your local market absolutely requires AC for some reason. But a plug-in heater that is not hard-wired is not deemed permanent, so in my mind it’s not likely to work if that is the only source of heat. But keep in mind if the other heat system works and is deemed permanent, then you’re fine to add an additional heat / air unit that is in the window. This plug-in unit would simply be supplementary to what already exists.
That’s my take without knowing your market. Before buying anything or making any move I would definitely ask the appraiser working on your appraisal because he or she will be the one to sign off on the report, and I would defer to that person for your local market.