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FHA Appraisal Requirements: What You Need To Know

When obtaining an FHA loan, an appraisal is typically required. This assessment not only determines the property’s value but also ensures its safety for the homeowner or potential buyer. 

The following article delves into the intricacies of the FHA appraisal process, assists in crafting a practical checklist, addresses the aftermath, and outlines the subsequent steps.

Understanding FHA Loans: Exploring the Basics

FHA loans, backed by the Federal Housing Administration (FHA) under the Department of Housing and Urban Development (HUD), provide homebuyers with opportunities for lower down payments and more flexible credit terms compared to traditional mortgages. Qualifying for an FHA loan necessitates meeting specific borrower and property criteria, including an appraisal and inspection conducted by an FHA-approved appraiser. 

Similar to other government-backed loans, an FHA loan falls under the category of non-conforming loans.

See What You Qualify For

How does the process of FHA appraisals work?

An FHA appraisal, along with any home appraisal, serves two main objectives: determining your home’s value and conducting basic safety inspections. While there may be unique aspects to an FHA appraisal, the process remains fundamentally similar to that of appraisals for other mortgages.

Why is an FHA Appraisal Necessary?

When you receive an appraisal, the property is valued to ensure the lender doesn’t exceed its worth in the loan. In case of loan default, the lender must sell the property to recover funds for investors. Though not anticipated, mortgage investors prepare for worst-case scenarios.

For home buyers, the valuation prevents overpayment by providing the current market value. Safety checks in an FHA appraisal relate to move-in readiness; issues like exposed floorboards or non-functional utilities pose health and safety risks. Specific FHA standards will be discussed further below.

Distinguishing Between FHA Appraisal and Home Inspection

Before diving deeper, it’s important to distinguish between an appraisal and an inspection. An appraisal assigns value to a property and includes a basic safety check. Its purpose is to ensure that the loan-to-value ratio (LTV) post-purchase poses an acceptable risk for both the lender and the FHA, the mortgage investor.

In contrast, a home inspection entails a comprehensive evaluation of a property you intend to purchase, aimed at uncovering any potential issues. This process allows you to assess the property’s condition and determine your comfort level with it. The inspection covers examination of all primary systems, included appliances, and the roof of the home. Additionally, specialized inspections can be arranged for features such as septic systems and chimneys, if needed.

How FHA Appraisers Determine the Value of a Home

An appraiser’s main role is to determine the fair market value of your home. This involves assessing your home’s condition and amenities. Following the inspection, they search for comparable recent sales, known as “comps.”

The term “comparable” is crucial here. Properties must share similarities to be deemed comparable. For instance, four-bedroom colonial homes are matched with other four-bedroom colonials, not with three-bedroom ranch properties.

Typically, comps are compared to homes in the same or nearby neighborhoods. Although there may be flexibility in areas with more spaced-out homes, this is the exception rather than the norm. Usually, up to three comparable properties are considered.

Using this analysis, the appraiser compiles the information to determine the property’s fair market value.

Key Aspects FHA Appraisers Consider

Beyond assessing the property’s value, an appraiser must remain vigilant for factors impacting residents’ well-being, structural stability, and the property’s marketability. They scrutinize elements potentially hindering normal use or future sale prospects.

Health and Safety Guidelines for FHA Appraisals

From a health and safety standpoint, an appraiser examines concerns related to:

  • Hazardous materials
  • Toxic substances
  • Mold
  • Damaged or defective asbestos
  • Urea-formaldehyde
  • Problems with insulation
  • Radon gas

Furthermore, specific regulations apply to the placement of power lines. FHA loan approval is not granted for properties within a 300-foot radius of a tank holding over 1,000 gallons of flammable or explosive substances. For properties in designated lava flow zones in Hawaii, loan accessibility is limited due to restrictions.

FHA Appraisal Guidelines Regarding Lead Paint

An important aspect of FHA loans pertains to homes constructed before January 1, 1979, a time when lead paint was commonly used. If there are signs of chipped or peeling paint, it is necessary to address this issue. Remedial actions may include, but are not restricted to, implementing one of the following solutions:

  • New paint
  • Priming the area
  • Treatment on wood surfaces
  • Siding installation
  • Other remedies that protect the surface from the elements

After an FHA appraisal, what comes next?

Let’s delve into the process from the perspective of a potential homeowner, Casey. While each situation varies based on the workload of the appraisal management company, the complexity of the appraisal process, and the search for comparable properties, Casey can anticipate receiving the appraisal report within a few business days. 

This section will explore different scenarios that may arise during the home purchase or refinancing journey.

The Home Sale Appraisal Returns a Low Valuation.

In our initial scenario, let’s consider a made an offer of $480,000, which was accepted, but the appraisal values the property at $460,000. Given that banks typically won’t sanction loans exceeding the home’s appraised value, two alternatives arise:

Adjust the Sales Price Downward or Renegotiate

If the seller agrees, they may reduce the price to match the appraisal, especially if they’re eager to sell. If not, renegotiation is an option. In that case, you’ll need to cover the difference between the appraised value and the final price at closing, along with your down payment and other costs.

To streamline negotiations, consider inserting a clause in your purchase agreement stating that you’ll pay a set amount above the appraised value, up to a specified limit.

Cancel the Contract

If negotiations hit a dead end with the seller over the price, your only option may be to step back. In this scenario, ensuring an appraisal contingency is included in your purchase agreement becomes crucial.

This contingency empowers you to renegotiate or back out if the appraisal value falls short. Without this safeguard, you risk forfeiting your earnest money deposit. This deposit indicates your commitment to finalizing financing for the property through escrow.

To safeguard your deposit when walking away, your reasons must align with a defined contingency in the agreement.

The refinance appraisal returns with a lower valuation.

If you own a home and are looking to refinance the current mortgage, a low appraisal can lead to various implications. If the appraised value is lower than the initial estimate, there are a few options available. 

You could consider restructuring your loan. For instance, if you expected your home to be valued at $200,000 but the appraisal values it at $175,000, your maximum loan amount would decrease from $160,000 to $140,000. This might result in adjusting your cash-out plans, consolidating less debt, or contributing additional funds at closing to bridge the gap, if the loan still makes sense. 

If, upon exploring alternatives with your lender, the loan is no longer advantageous, it will be denied, and the refinancing process will conclude.

The Appraiser Seeks Additional Repairs

Consider a scenario: Casey has found a home to love, yet it requires electrical work to meet code. The appraiser insists on these repairs for the transaction closure. Ideally, Casey can negotiate for the seller to cover the costs. If not, the buyer has the option to pay for the repairs.

When is the Ideal Time to Complete Repairs?

Typically, repairs crucial for the safety and habitability of the property must be done before the transaction closes. However, in certain cases, collaborating with your mortgage lender can enable you to address these post-closure through an escrow holdback arrangement.

An escrow holdback involves setting aside a portion of the loan for non-urgent repairs like sod, gutters, deck, driveway, and pest treatment, which can be completed later without compromising safety.

The appraisal matches or exceeds the anticipated amount.

If the appraisal matches or exceeds the amount specified in your purchase agreement or refinancing terms, you are in an ideal situation. Proceed with your transaction smoothly.

FHA Inspection Checklist: A Comprehensive Guide for Property Evaluation

Home inspectors meticulously assess a property’s vital elements to verify their proper functionality. They conduct a thorough examination of a home’s:

  • Roof and gutters
  • Attic and insulation
  • Walls and ceilings
  • Windows and doors
  • Floors
  • Foundation
  • Appliances
  • HVAC system
  • Plumbing and electrical systems

Requirement for FHA Appraisal and Inspection

The prospect of an FHA appraisal can be daunting, but the silver lining is that you won’t have to do much on the appraisal day. The appraiser takes care of the heavy lifting.

Getting Your Home Ready for an Appraisal or Inspection

Ensure they have access to the necessary areas. Tidying up your home is beneficial. While cleanliness isn’t the focus, clear walkways are important. If your pets are wary of strangers, consider crating them or seeking help from a trusted friend or family member.

Safety Measurements

Do not be surprised if an appraiser wears personal protective equipment or requests you to wear a mask and maintain distance. They might prefer you to accompany them while they inspect the house, turning on switches and faucets, rather than having the appraiser, an outsider, touch everything in your home.

Frequently Asked Questions Regarding FHA Property Appraisals

To conclude, let’s address some frequently asked questions about FHA appraisals and inspections.

How long is an FHA appraisal good for?

Typically, FHA appraisals remain valid for 180 days. Occasionally, the appraiser may renew the valuation if they concur to do so before the initial appraisal lapses.

What won’t pass an FHA inspection?

FHA prioritizes matters impacting property safety and livability. Failure to address significant safety or health risks results in appraisal failure, necessitating rectification before mortgage closure. Examples include exposed floorboards, absent handrails, or peeling paint in pre-1979 constructions.

How much does an FHA home appraisal cost?

An FHA home appraisal, initiated by the lender and funded by the buyer, incurs varying costs dependent on factors like demand, appraiser travel distance, property size, units, and land area.

Typically ranging from $500 to $2,000, the appraisal fee may be covered as part of your deposit or closing costs with a lender.

How long does it take after an appraisal to close on an FHA loan?

The duration for closing on a house can vary significantly. Refinances typically conclude faster than purchases since an appraisal may not be required, and the title work is usually less extensive. The steps involved can vary based on the loan type you are seeking.

Typically, the FHA loan process spans between 30 to 60 days. Nevertheless, challenges with appraisals can extend this timeframe. The FHA permits up to 120 days for essential repairs to be completed.

Key Takeaway: FHA Appraisals Safeguard the Interests of Lenders and Home Buyers Alike

Real estate appraisals, like FHA appraisals, focus on determining a home’s safety and value. Unlike a home inspection, which delves into the property’s condition, an FHA appraisal evaluates hazards such as mold, non-functional utilities, and lead paint. 

Ensuring all areas of the house are easily accessible is crucial for a smooth FHA appraisal process. In case of a low appraisal, options include renegotiating with the seller or walking away with an appraisal contingency in place to secure your earnest money deposit. 

Ready to begin? Apply today with Elevation Mortgage.

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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