Know what your FHA appraiser is looking for and find out everything you need to know about the process.
You probably already have some understanding of the appraisal process: mortgage lenders require it to ensure that the property they’re financing is actually worth the money that’s being borrowed. This means that, in the unfortunate event of a foreclosure, the bank will be able to sell the property in question for enough money to cover the initial loan. However, you might not be aware that for FHA (Federal Housing Administration) loans, the appraisal process takes on even more importance than in a conventional loan scenario.
For buyers considering an FHA loan, it’s a good idea to understand the FHA appraisal and loan approval process. That way, you can make sure that your home purchase is not derailed by a low appraisal or unaddressed problems with the property. We’ve compiled a handy guide to help you understand FHA appraisals:
What is the purpose of an FHA appraisal?
FHA appraisals seek to ensure that the property is safe, sound, secure, and habitable. Utilities must be functioning properly so that the home’s systems can be evaluated, and convection appliances must be in working order. Any aspects of the property that do not meet FHA guidelines must be carefully recorded for subsequent follow-up.
The rigorous FHA appraisal process actually protects both the borrower and the lender. Because FHA loans require a lower down payment than most conventional loans, the borrower goes into homeownership with far less equity—and less incentive to stay put in the face of a market downturn or financial setback. By determining that the property is in good living condition, the FHA appraisal ensures that borrowers won’t get into the home and experience a financial hardship due to a costly major system or structural failure that renders them unable to pay their mortgage.
What is the difference between a conventional appraisal and an FHA appraisal?
In an appraisal for a conventional loan, the appraiser is primarily interested in the valuation of the property. Whatever its condition, the property value needs to be sufficient to secure the loan itself.
On the other hand, an appraisal for an FHA loan is designed not only to determine that the property is appropriately valued but to assess its condition as well. Crucially, this will help to ensure that you and your family are taking on a structurally sound home that meets requisite health and safety standards.
What is included in an FHA appraisal?
An FHA appraisal looks at the following aspects of the property and its location. Any necessary changes or repairs are carefully recorded and noted by the appraiser, along with an estimated cost for repairs. These repairs must be completed before the FHA loan can be approved:
- Home exterior, foundation, and roof must be undamaged.
- Access to the property must be safe and reasonably available.
- Electrical systems must be in good repair with no loose or exposed wiring.
- All utility hookups must be turned on at the time of the inspection, including gas (if applicable), electricity, water, and sewage.
- Property must be free of damaged underground storage tanks and contaminated soil.
- Home must contain a working heating system of a size adequate to heat the property.
- No chipping or peeling lead-based paint should be evident.
- Attic spaces and crawl spaces with natural ventilation must be accessible.
- Property must have access to clean water.
- Property should be free of wood-destroying insects.
- Interior and exterior health and safety hazards, if identified, must be addressed.
- Property must be marketable in relation to its neighborhood.
- Property must meet current zoning requirements for the area.
New construction homes must be 90% completed upon appraisal and the items needed for completion will be noted in the appraisal report. FHA 203(k) rehabilitation loans that are given for distressed properties will include a list of needed repairs that must be carried out as part of the renovation.
Who can conduct an FHA appraisal?
An FHA-approved appraiser will conduct the appraisal. These are state-certified professionals who appear on the national registry from the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). FHA appraisers must not be listed on the GSA’s Excluded Parties List System, System for Award Management, Limited Denial of Participation List, or HUD's Credit Alert Verification Reporting System.
What happens if the FHA appraisal is too low?
If the FHA appraisal shows that there are problems with the property, you will have a number of options, including the following:
- The loan officer can request a re-evaluation or a new appraisal if there is reason to believe that there was an error in the appraisal.
- The buyer and his or her representative can provide additional information to support a higher property value based on comparable properties and market conditions.
- The buyer can add more money to the down payment to make up the difference in price based on the appraisal.
- The seller can lower the sale price in order to respond to deficiencies in the property value or condition.
- The buyer and seller can negotiate repairs as appropriate to bring the property into compliance with the requirements of the appraisal.
- The buyer can switch to a new loan type, including an FHA 203(k) rehabilitation loan or a conventional mortgage loan.
How long is an FHA appraisal good for?
An FHA appraisal is good for 120 days from the date it was conducted. However, if you experience a delay in closing, a 30-day extension may be granted as appropriate.
Whatever type of mortgage you’re looking for, you can count on your Simplist licensed loan expert to offer the best, most up-to-the-minute information and insight. That translates into better decision-making and savings, both now and in the future. Contact us today to set up an initial consultation or to begin your application process—we’re here to ensure it’s delightful from start to finish!