FHA Appraisal: Guidelines & Requirements In 2021

Key Takeaways:


The FHA appraisal process has developed a reputation for being strict and overbearingly meticulous. That said, the Federal Housing Administration (FHA) adheres to uncompromising guidelines to service less-qualified borrowers. Through the help of an FHA appraisal, many prospective buyers who otherwise wouldn’t have been approved for a loan are granted the capital they need to buy a house. As a result, the FHA appraisal process has become a necessary catalyst for not only first-time buyers, but also the entire housing sector.

What Is An FHA Mortgage?

Aptly named, FHA mortgages are home loans that the Federal Housing Administration insures. The government backs these particular loans so that traditional financial institutions may provide capital to less-qualified borrowers. In particular, government-backed loans are reserved for those who can manage a FICO score of at least 500 and who can come up with a down payment of 3.5%. In return for the added risk qualifying banks take on, the FHA is willing to insure the loan to mitigate the risk lenders take on. In backing loans, the FHA simultaneously enables more buyers to participate in the market and catalyzes the entire economy.

It should be noted, however, that FHA loans will require borrowers who put down less than 10% to purchase mortgage insurance. With less equity in the home at the time of purchase, borrowers represent more of a risk to the lender. To offset said risk, borrowers will pay mortgage insurance each month until they have built up enough equity in the home. That is an important distinction: conventional mortgages require anyone who puts down less than 20% to purchase mortgage insurance.

What Is An FHA Appraisal?

The FHA has every intention of providing home loans for less-qualified borrowers. To do so, however, the FHA asks for something in return: an FHA appraisal. As an enabler of purchases, the FHA needs to make sure the homes they are financing are properly valued and suitable to live in. Therefore, anyone seeking financing through an FHA loan will need to have the subject property appraised by an FHA-approved appraiser. Not unlike a traditional appraiser, an FHA-approved appraiser will value the home based on its merits. In addition to the traditional role of an appraiser, FHA-approved appraisers will also make sure the home meets strict safety criteria.

To be clear, an FHA appraisal isn’t fundamentally different from a traditional appraisal. While there may be a few alternative steps, the result is the same: the appraiser will determine an appropriate value for the home to ensure the lender isn’t approving a loan for more than the property is worth. The lender (and the FHA) needs to be comfortable with the appraisal because they will need to recoup their investment in the event of a default. On the other hand, homebuyers can take solace in the fact that they aren’t overpaying for a house.


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FHA appraisal guidelines

FHA Appraisal Vs. Home Inspection

Through no fault of their own, far too many buyers confuse home appraisals with home inspections. While they sound similar, these two processes are inherently unique and seek two different conclusions.

An FHA appraisal (and a conventional appraisal) seeks to accomplish two things: applying a fair market value to the subject property and conducting a basic safety inspection. On the surface, an appraisal looks like a quick way to identify how much a home is worth. However, when you really break appraisals down, they are a tool for lenders to gauge the risk of borrowers. Once the lender has a value to work with, they’ll anticipate the borrower’s monthly payments (and their loan-to-value ratio). The lower the ratio, the lower the risk the borrower represents.

Not to be confused with appraisals, home inspections are a more thorough inspection of the property. Instead of trying to identify a value, inspections seek to pinpoint any issues the home may have. A home inspection will give buyers insight into the condition of a home before they buy it.

What Types Of Homes Can Be Approved?

Traditionally, FHA loans are reserved for owner-occupied properties. Since the FHA won’t finance homes sold within the last 90 days, investment properties are not usually eligible for FHA loans. Nonetheless, eligible property types include:

  • Single-Family Homes (otherwise known as detached or semi-detached dwellings)

  • Manufactured Homes

  • Townhouses

  • Rowhouses

  • Condominiums

Assigning Value On A Home

The primary responsibility of an FHA appraiser is to determine the fair market value of a subject property. In doing so, the appraiser will take many things into consideration, not the least of which include the home’s condition and its amenities. Once everything in the home has been accounted for, the appraiser will cross-reference their valuation with nearby comparables (similar homes that have recently sold). A fair market value will be assigned using the data collected from their own appraisal and recent home sales. Typically, the appraiser will use comparables as a starting point and increase or decrease the value of the subject property based on its own condition and amenities relative to the “comps.”

Safety Evaluation

In addition to determining a fair market value, an FHA appraisal will also conduct a safety evaluation. At the very least, it’s the FHA’s responsibility to make sure the home meets strict health and safety criteria. To be clear, the safety evaluation serves a dual purpose. For starters, it looks for anything that would have a negative impact on the normal use of the property. Secondly, the health and safety audit checks for any red flags which may arise in the future sale of the property.

A typical safety evaluation conducted by an FHA appraiser will check for the following:

  • Asbestos

  • Hazardous Materials

  • Mold

  • Insulation

  • Radon Gas

  • Toxic Substances

  • Urea-formaldehyde

  • Powerline Locations

  • Combustible Liquids & Materials

  • Natural Disasters

FHA Appraisal Guidelines

The guidelines put forth by the FHA for their own appraisal process are strict. In appraising a house, for example, an FHA-qualified appraiser will look at all of the following safety hazards:

  • Exposed floorboards or studs

  • Problems pertaining to electrical wiring or circuit breakers

  • Improper draining across the entire lot

  • Poor heating systems

  • Cracks in the foundation

  • Water damage

  • Holes exposing the interior

  • Unfinished renovations

  • Missing handrails

  • Issues with the roof

  • Siding problems

  • Chimney functionality & blockage

  • Plumbing

  • Lead paint

  • Signs of pests

  • Chipped or peeling paint (on homes built before January 1, 1979)

It is important to note that an FHA appraisal will look at many things, but it won’t account for the general wear and tear on the property.

How Long Does An FHA Appraisal Take?

The appraisal itself takes several hours or the better part of a day. In that time, the appraiser will meticulously walk through a subject property and take note of anything which will impact the vale. That said, today’s housing market is firing on all cylinders. While the appraisal won’t take too long, getting an appraiser to the home will vary. More often than not, lenders can send a qualifying appraiser out within a week of accepting an offer. However, today’s busy market may actually delay the process.

What Does An FHA Appraisal Cost?

Since FHA appraisals must be conducted by qualifying individuals, prices can’t be shopped around or negotiated. Still, the cost of an FHA appraisal will depend on several factors: how far the appraiser has to travel, the size of the house, and how much land needs to be covered. That said, it’s safe to assume an FHA appraisal will run buyers somewhere in the neighborhood of $300 – $500. The cost may be applied to subsequent closing costs, or the buyer can include it in their deposit with the lender.

What Happens After An FHA Appraisal?

What transpires after an FHA appraisal is entirely dependent on the results of the appraisal itself. If, for example, an appraisal doesn’t reveal any health or safety hazards and the appraised value is close enough to the sales price, the lender may underwrite a loan for the borrower. Of course, not everything always goes according to plan. Let’s look at what happens if repairs are needed or the appraisal comes back too low.

If An Appraisal Comes Back Low

In the event an FHA appraisal comes back too low, meaning the home is worth less than the sales price, the lender will most likely not approve the loan. If that’s the case, however, the deal isn’t destined to fall apart. Instead, sellers can pursue a number of solutions:

  • The seller can request a copy of the appraisal and challenge it

  • Buyers in a competitive market who are forced to overpay may challenge the appraisal

  • The buyer and the seller may renegotiate the sales price to resemble the appraisal

  • The seller may offer to finance the deal without the help of a bank

  • Ask for an all-cash offer

  • If worst comes to worst, the seller will need to cancel the deal and resist the home

If The Appraiser Requests Repairs

Following the completion of an FHA appraisal, the lender will comb over the report and conclude whether or not additional steps need to be taken before the loan is underwritten. That said, the lender can make repair suggestions; that way, the home will pass health and safety standards, and it will be easier to sell later. To be clear, the lender will most likely detail what needs to be done to the home for the impending transaction to move forward. The repairs will be the responsibility of the owner unless otherwise stated in the sales contract.

How To Find FHA-Approved Homes

The Department of Housing and Urban Development (HUD) has done the heavy lifting and compiled a list of FHA-approved living arrangements. Therefore, finding FHA-approved homes may be as simple as visiting the Department of Housing and Urban Development’s website and searching local listings. That said, almost any detached house, townhome, manufactured house, and condominium will be eligible—as long as it meets the previously discussed FHA requirements.

Summary

FHA appraisal guidelines are more strict than conventional appraisals. However, the uncompromising rules impending buyers need to follow are for everyone’s own good. While the FHA appraisal is a safety net for the government agency, it also helps get people into homes that have met critical health and safety criteria; it’s a win-win scenario. All that said, the FHA doesn’t back every mortgage; it’s on buyers to know which houses qualify. This guide should serve as a roadmap to help buyers identify the homes that qualify for an FHA mortgage and the process that will ensue.


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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.