Appraisals are used by lenders to determine a property’s value to protect their own interest and the homebuyer’s investment. Interestingly, there are different types of home appraisals based on the type of financing used for the home, including conventional mortgage loan appraisals and Federal Housing Administration (FHA) appraisals.
If you are planning to use an FHA loan to buy a house, the property will have to be appraised by a HUD-approved home appraiser. This individual will determine the current market value of the property, and will also inspect it to ensure it meets HUD’s minimum property standards.
Conventional Mortgage Appraisals
Mortgage loans issued by private lenders like banks and credit unions are called “conventional loans”. The appraisals used for conventional mortgages are typically focused on the value of the home and property being appraised. Conventional mortgage appraisals use one of three valuation methods to determine a point of value.
During this process, the appraiser will look at comparable properties that have sold recently, in the same area as the one being purchased. They will also visit the “subject property” and evaluate it both inside and out. After this review process, the appraiser will write a report to detail his findings. It will include an estimated value of the home, as well as any required repairs.
The report will then be sent to the mortgage lender for review.
FHA Mortgage Appraisals
Because the FHA insures their mortgage on behalf of eligible borrowers, the FHA requires their home appraisal address certain factors of the home before granting financing. While the FHA orders an appraisal to protect their investment, the basic concept of these appraisals is that everything in the home functions as intended. For example, windows should close tightly and doors should lock properly.
FHA appraisals aim to ensure the home the FHA is insuring is safe and secure for its occupants.
When an FHA loan is being used, the appraiser has two objectives. The Department of Housing and Urban Development (HUD) requires the current market value be determined, as with any appraisal. But they also require a property inspection to make sure the home meets HUD’s minimum standards for health and safety. That’s what makes the FHA appraisal process unique.
According to the 2016 FHA appraisal guidelines, a licensed, HUD-approved home appraiser must appraise all properties being purchased with an FHA-insured mortgage loan.
At a minimum, the appraiser must complete the following steps:
- Visually inspect the subject property both inside and out.
- Take photos of the property to be included within the loan file. The photos must show the sides, front and rear of the home, as well as any value-adding improvements such as a pool or patio.
- Take a photo of each comparable sale transaction that is being used to support the appraisal.
- Obtain and provide a copy of a street map that shows the location of the property and each comparable sale used during the valuation.
- Take photos that show the grade of the lot, if it’s a proposed construction.
Certain things will be noted in an FHA appraisal, but due to the unique characteristics of each individual home, certain items may be subjective to the appraiser’s opinion. In general, FHA appraisals are meant to determine if everything is in working order, if there are any issues that present a safety or health concern, and if there are any issues that would affect the marketability of the home.
Here is a comprehensive list of what an FHA appraiser generally inspects during the appraisal of the home:
- Utilities must be turned on to test the systems and appliances for functionality
- Proper drainage must be found around the perimeter of the home
- Active termite infections must be addressed and cured
- Windows must open and close with no broken panes
- No chipping, peeling or flaking paint on homes built before 1978 for danger of lead-based paint
- No defective paint or bare wood for homes built after 1978
- No dangling wires from missing fixtures
- Smoke and carbon monoxide detectors must be present and meet local ordinances
- Adequate water pressure and testing of both hot and cold water
- Water heater must be in working order and meet local code requirements
- Attic must have appropriate venting, no damage, no exposed or frayed wires, or sunlight beaming through
- Crawlspaces must have no signs of standing water or foundation issues
- Electrical outlets must be in working condition with appropriate cover plates
- Firewall from the garage to the home should be intact
- Roof should not be leaking and must have at least two years of economic life left. The FHA will not accept roofs with over three layers of existing roofing.
Making Repairs After the Inspection
There’s a common misconception that FHA appraisals are unnecessarily strict, and that any inspection “hits” will end your chances of getting a loan. This is incorrect, as most discrepancies are fully correctable. If they are corrected before the final inspection (when the appraiser follows up on the original list), the loan can still move forward.
In most cases, the only real issues that would prevent a closed sale are serious safety issues that cannot easily be corrected. An example would be a bedroom with no windows or doors, and therefore no egress in the event of a fire. Another example would be an older home with a deteriorated roof and holes in the floor. In both of these cases, the discrepancies create hazardous conditions and most likely cannot be quickly fixed.
In most cases, however, discrepancies can be resolved fairly easily — if the seller is willing to fix them. If the items are repaired or corrected to the appraiser’s satisfaction, the sale can move forward.
FHA standards are quite firm, but there may be instances when the appraiser must use their best individual judgment in how the spirit of FHA might apply. A home can also be rejected if the site is subject to hazards, environmental contaminants, or excessive noxious odors or noises affecting the safety and livability of the property.