Sorry, but I'm not going to be much help either. Each lender is going to have their own interpretation and/or requirements with regards to those items. You should really find a FHA lender to work with and find out what they will specifically require.

Carpet, per see is not a requirement .. but the home is supposed to be in livable condition, and bare concrete floors might not meet that requirement.

In addition, if the garage conversion violates zoning..or if it was not done with permits and final inspections, that could cause complications as well.

Concrete has become a very trendy flooring materal...it can be found in million dollar plus homes; be that as it may, I can't see how they could require something different.

Considering you're in AZ, I bet carpet isn't a requirement and that concrete, if painted may be OK. It's awfully hot in most AZ places, so tile is the norm. I was talked out of putting carpet in my LR and DR in Tucson b/c it would prevent the house from selling.

I think this is one of those things that depends on region and the lender. Your lender may find concrete floors, albeit finished, are satisfactory in AZ. In Minnesota? Perhaps not b/c of the frigid winter.

Speaking of foreclosures, I was looking at listings in our area last night online. We're looking to refi to get a lower rate and I came across this as is foreclosure that was completely stripped and the buyer must spend $120K on the retaining wall. Look at all the price drops too:

If the link doesn't show the actual page (aka need a login), the MLS number is: 3468429 in Apple Valley MN

Here is a link that might be useful: Apple Valley MN stripped Foreclosure

We purchased our home as an "AS IS" foreclosure with a VA loan.. I can tell you that there is no such thing as reduced pricing simply because it is listed as AS IS when it comes to a home loan if that is what you are asking? The lending party will inspect and appraise the house and property at what they consider a reasonable price whether you feel it is reasonable or not regardless of the asking price.. The inspection will reveal in written detail what is acceptable and what is not.. AS IS means as it stands NOW..meaning that the institution that owns it will not put any further work into that property for repairs etc. It's up to the foreclosing owners to decide if they will make any improvements such as roofing, etc. to get the property sold but usually AS IS means no further repairs unless the prospective buyers want to throw money into that property and bring is up to inspection codes before going to closing. It would be foolish to throw your own money into housing that may in the end not be yours.. Keep in mind that YOU will be paying for all inspections and appraisals most likely..we did anyhow.. I will admit freely that the VA and FHA have a very thorough inspection system which is for your benefit and we have dealt with both of these government backed loans. I will also mention from experience that foreclosures are almost certain to have liens of some type on them and ours was not discovered until the title search was completed and that lien must be paid off by the owning/foreclosure institution and that sure held up our closing date. I am sure others have had exceptionally good results with buying a foreclosed property, we didn't, and I will never deal with a foreclosed property again. I see nothing wrong with the concrete flooring as long as it's not cracked, it is acceptable flooring in different parts of the country. I would definitely contact the owning institution listed by way of the realtor and get your answers upfront as to who and what resposibilities are for each party. YOUR lending institution is there to safe guard you and themselves, not so with the sellers. Good luck and happy house hunting and get it ALL in writing!