The U.S. Department Of Housing and Urban Development (HUD) offers a government-backed mortgage designed for people with low income and poor credit scores. With more affordable interest rates and a low 3.5% down payment requirement, Federal Housing Administration (FHA) loans allow people to buy homes when they wouldn’t otherwise qualify for a conventional mortgage.
But before you can take out an FHA home loan, the property must meet its minimum property standards. How do they ensure this? They conduct an FHA appraisal.
In this guide, you’ll learn all about FHA appraisals, what appraisers look at, and what requirements your property needs to fulfill so that you can secure a mortgage.
Let’s get started!
What Is An FHA Appraisal?
In the real estate industry, an appraisal helps the lender determine what the market value of the home is. But an FHA appraisal is slightly different. While it still helps to establish the property value, its more important objective is to determine whether or not the home is safe, sound, and secure for you to live in.
Since the FHA is the one insuring your mortgage, they want to be sure that your property is a sound investment. They look at a few things, like:
If the home is worth the amount of the loan
If the property has to undergo any repairs before FHA will grant the loan
If the home will outlast the term of the mortgage
What the special features (topography, soil, easements, etc.) around the property site are
If the home is livable and structurally-sound
To do this, the appraiser will visually inspect both the inside and outside of your home, then write their findings in their report. They may also take pictures as evidence of the condition of your home. The appraisal should be conducted by a licensed appraiser approved by the Department of Housing and Urban Development.
If the appraiser determines that the physical condition of the property meets their minimum standards and that living there will not pose any threat to your health and safety, you are one step closer to getting your FHA loan.
If not, they’ll either require repairs before they grant you the loan or reject the property altogether. They might also recommend further inspection.
How Does An FHA Appraisal Benefit You?
An FHA appraisal is required by most lenders because it protects them. If they fund your loan and you default, they will seize your property instead. They want to be sure that the home is livable, functional, and most importantly, marketable in case they have to sell it off to recoup their losses.
Appraisals protect you as well by helping you identify potential issues before you shell out hundreds of thousands of dollars. Homes that pass this stage are also less likely to require expensive repairs in the long run. Plus, if you live in a home that’s actually sound and secure, you’ll be more motivated to make your monthly payments.
Is An FHA Appraisal The Same As An Inspection?
Inspections and appraisals have overlaps, but they’re two very different things. Appraisals help a lender determine the health and safety of the property as well as the value of the home. This is done through a basic visual search and walkthrough. An inspection, on the other hand, is much more in-depth, requires special tools, and can take several hours.
Appraisals are always required by lenders; an inspection is recommended but not required in most cases. An appraisal will determine how much you can borrow; an inspection won’t. An appraisal considers the entire property – size, features, location, etc. – while an inspection only looks at the condition of the home.
When Do You Need An FHA Appraisal?
FHA appraisals are only conducted for borrowers that want to take out a government-backed loan through the Federal Housing Administration. The appraisal is mainly for mortgage insurance purposes, which is required for all FHA loans regardless of your down payment.
It’s a myth that the FHA requires two appraisals per property. You only need the one, which is already bundled with a basic inspection. However, if you want a more thorough inspection of your property, you’ll need to arrange for that separately.
Appraisals are valid for 120 days with the possibility of a 30-day extension for certain borrowers. If the lender updated the initial appraisal, it becomes valid for 240 days. Your appraisal has to be valid at the time of closing; otherwise, you may need to get another one before a lender will agree to fund your home purchase.
What Type Of Homes Are Eligible For FHA Loans?
Before you can start the appraisal process, you have to know whether or not the property is eligible for an FHA loan in the first place. One major FHA requirement is that the home must be owner-occupied; it can’t be an investment property, rental property, or vacation/second home.
It also can’t be a flipped home or a property that was sold in the last 90 days. Generally, most single-family homes, townhouses, and condo units are eligible as long as you plan to reside there.
What Is The Process Of Getting An FHA Appraisal?
The process of an FHA appraisal is quite similar to conventional appraisals. Here’s what you can expect:
You find a property that you’re interested in buying.
You agree to a sale price and sign the contract with the seller.
You submit the contract to your lender of choice.
The lender arranges for an appraisal with the FHA.
The appraiser goes to the property and conducts the appraisal on-site.
The appraiser prepares the report and submits it to the lender.
If there are no major violations of the FHA guidelines, move on to Step 9. If there are, the appraiser will indicate what exactly needs to be repaired.
The lender approves or rejects your loan application.
There are times when an FHA appraiser is unable to determine whether a property meets the minimum property standards set by the HUD. In that case, the lender can arrange for another inspector to scope out the property.
FHA Requirements For Your Home Appraisal
The appraisal checks your home against the FHA’s minimum property standards. Here’s are some of the basic requirements:
The foundation must be sound and in good condition.
The property must have adequate and safe access to pedestrians and vehicles.
There must be a safe waste disposal/sewage system.
Water must drain away from the house walls.
The property must be free of hazards and unsafe conditions. This includes environmental hazards (e.g. soil contamination) and home hazards (e.g. lead paint or asbestos walls).
If the house was built prior to 1978, there should be no paint chips, flakes, or peels. This is because lead was commonly used in paint during that period.
If the house was built after 1978, there should be no bare wood or defective paint.
The home must not have any major construction defects such as leaks, decay, damaged floors/walls, etc.
All rooms must have functioning heating, plumbing, and other utilities. All utilities need to adhere to local building codes.
The home must have a working toilet, sink, and shower.
Electrical wires should not be frayed or exposed.
Water supply should be sufficient and have adequate pressure throughout the home.
The roof must be sealed properly to not let in moisture. It must also have more than two years of life left in it.
Crawl spaces need to be easily accessible and adequately ventilated.
There must be no evidence of termite infestation or structural damage due to previous infestation.
Bedrooms must have an exit path in case of emergencies. This includes fire exits or large enough windows.
There shouldn’t be excessive noise, noxious odors, and other hazards.
Lenders may also have additional requirements such as maintenance, separate utilities for separate units, and adequate space between buildings.
The main concern of an FHA appraiser is the health and safety of the property. Appraisers will NOT look at:
Cracked glass, countertops, or doors that are otherwise operable
Worn floor finishes
Cluttered crawl spaces
Other minor defects that do not affect the health and safety of the occupants
If you want to check out the full list of requirements, you can read the HUD FHA loan requirements 2019 handbook. It’s a bit of a tough read, but it provides you with every FHA guideline you’ll need to secure your mortgage.
What Happens If The Appraiser Finds Issues With Your FHA Home?
If your home doesn’t meet the requirements, the appraiser will note any items that need to be repaired or inspected further. The seller is usually liable for the repairs unless otherwise agreed upon in the contract. For example, if you agreed to buy it “as is”, then you have to pay for any repairs to make the property FHA compliant.
In most cases, repairs are enough to pass the appraisal. But if there’s serious structural damage or environmental hazards, your loan application will likely get rejected. Your options here include:
Looking for another property
Choosing an FHA 203k loan, which allows you to both purchase the property and finance the repairs
Applying for a conventional mortgage, which doesn’t have strict appraisal requirements
How Much Does An FHA Appraisal Cost?
Different appraisers charge different rates, but the choice of the appraiser is usually not up to you. It’s the lender who orders the appraisal and, therefore, gets to decide which appraiser to go with.
Appraisal costs also vary depending on the location, property size, and other factors. You can expect to pay several hundred dollars for the appraisal. Payment is usually lumped in with your mortgage and other closing costs.
The FHA requires an appraisal to determine if your property is worth backing or not. Appraisers look at major structural and environmental problems that could affect the well-being of the people living there. If the house is not up to code, then the FHA won’t grant you a loan.
If you need help finding an FHA-compliant home, there’s no one better than Wesley Mortgage, LLC. Contact us to learn more about our mortgage appraisal services.