Getting a Mortgage With a Cracked Foundation

Most mortgage lenders won't settle for anything less than a solid foundation underneath your home. A cracked foundation damages your home, your wallet and your peace of mind. It also hurts your ability to qualify for most home loans. When getting a home with a cracked foundation, you'll need a substantial down payment or repairs to solidify the deal with your lender.

A seller's disclosure, a home inspection, your lender's appraisal or the obvious signs of foundation settlement may set off red flags during a transaction. Telltale signs of a cracked foundation include jagged cracks running up the walls at an angle, doors and windows that stick and uneven flooring. You must tell your lender if you know the foundation is damaged, even in the rare case in which the issue is overlooked during the appraisal inspection.

Homes must meet a lender's specific standards for fiscal and structural soundness. A cracked foundation hurts a home's future marketability and jeopardizes the lender's investment. Lenders take several measures to ensure your home is sufficient collateral for the new loan, including the appraisal inspection. If your lender finances homes with cracked foundations, you'll also have to hire a structural engineer, which costs between $300 and $1,000 for the inspection, to report the extent of the damage, make recommendations on repairs and estimate the cost.

Lenders may require proof of past repair work or up-front repair of the crack before they agree to finance the home. If the seller has fixed the crack, the lender wants to see proof of work completed and a lifetime warranty for the work. Your lender makes you address any lingering foundation issues after past work. Your lender can require foundation repair as a condition for the loan, meaning someone -- usually the seller -- fixes the crack and provides proof that all recommended work is complete, before closing.

Certain lenders offer rehabilitation loans, usually to borrowers with limited cash, to fix a cracked foundation after closing. The Federal Housing Administration and Fannie Mae, for example, offer rehab loans that allow for foundation repair. Lenders appraise the home to determine its projected value after work is completed, then finance a certain percentage above the home's current, or "as-is" value, which covers estimated repair costs. You must set up a repair escrow account that holds the repair funds, and an inspector may have to sign off on work as it's finished.

If you can afford a down payment of 25 percent to 40 percent, you might turn to a hard money lender. Investors as well as owner-occupant buyers use hefty down payments just to get their feet in the door. Investors typically re-sell the fixer-uppers to recoup their down payment and then some. Borrowers who plan to stay usually refinance the high-interest hard money loan after repairing the cracked foundation. You need a substantial amount of cash to put down and the resources, whether cash or a construction loan, to fix the foundation.