If you’re thinking of applying for a Federal Housing Administration (FHA) loan, you might be wondering: Why do I have to go through the FHA appraisal process?
The truth is, you would be hard-pressed to find any kind of purchase loan that doesn’t require an appraisal, whether that’s an FHA or Conventional appraisal. As a rule, for a lender to approve a loan on a property, they have to know if that property is truly worth the amount on your offer.
Remember, you’re not the only party investing in your new home, your lender is too. If you fail to live up to your end of the bargain by not making your mortgage payments, it’s the lender who will be forced to claim the property and try to sell it to another buyer in an attempt to make back as much of their investment as possible. Like any good business, mortgage lenders will do everything they can in their power to avoid losing money; this includes investing or lending on a bad property. With regards to FHA loans, the FHA appraisal is just one part of their efforts to reduce lending risk.
Fortunately for you as a buyer, FHA appraisals don’t just protect lenders, they also protect you, the borrower. An appraisal from an FHA-approved appraiser will tell you if the property you’re planning to buy is overpriced, defective, structurally unsound, or unsafe. This appraisal is based on a detailed home inspection that compares the subject property to similar (square footage, age, construction, amenities), nearby (closest to the subject property), and recently sold properties in the surrounding area. This FHA appraisal process not only mitigates risk on the lender's side, it also helps reduce your risk as a buyer.
The FHA Appraiser
Not all appraisers can perform appraisals for FHA-insured loans. To be an FHA-approved appraiser, appraisers have to pass the national FHA Appraiser Exam and be licensed by the state in which they are appraising. This additional exam means that an FHA-approved appraiser brings with them more appraising requirements that conventional loan appraisers are not held to.
FHA Appraisal Requirements
What are the requirements for an FHA loan appraisal? The basic appraisal requirements include:
- The property must exhibit safety, security, and soundness.
- The appraiser must conduct a visual inspection of the interior and exterior.
- The integrity of the property must be intact, with the home being safe and stable.
Getting The Most For Your Money
Unless other arrangements have been made, the cost of an FHA appraisal usually falls to the borrower to pay. This is typically specified in the loan agreement. Having said that, it’s not uncommon for some appraisers to demand a separate payment before the appraisal can occur and immediately after completion. In the event that you feel an appraisal is inaccurate or has been poorly handled, you are free to request a second appraisal.
What Goes Into an FHA Appraisal
Different from other appraisals, FHA appraisal guidelines require that an appraiser include in their appraisal a record of any deficiencies they discovered on the property. It must also include a comprehensive visual inspection of the inside and the outside of property, including the attic and crawl spaces, where applicable. Photographs of the street frontage, rear, front, and sides of the property are also required. During this process, appraisers are not allowed to move insulation or personal items, equipment, furniture, plants, snow, soil, ice, or anything that might be obstructing their view of parts of the internal or external property.
In the event the appraiser cannot fully access the property, the lender must reschedule the appraisal for another time. If the appraiser does not have full access to the full property, you'll need to contact your lender to schedule another time for the appraisal.
Following the inspection, the appraiser must fill out a Valuation Conditions (VC) form and include an addendum that lists comparable sale transactions in the area and a map showing the locations of each of these comparable properties. FHA appraisals are also required to comply with the Uniform Standards of Professional Appraisal Practice (USPAP).
While lenders may not demand that certain property problems be fixed, an appraiser will certainly take the overall condition and cosmetic defects into account when evaluating the property and its value.
Deferred maintenance items that are found in homes often include:
- Worn carpeting
- Worn floor finishes
- Small cracks in windowpanes
- Holes in window screens
Although these types of defects won’t affect the value of the property in a significant way or negatively affect the loan-ability of the property, they will certainly be reported in the appraisal and should be repaired by either the buyer or seller.
What else should be included in your FHA-approved appraisal?
- Safety impairments
- Construction defects
- Shortcomings in structural soundness
- Sanitation risks
Of course, there are some issues that the FHA will require to be repaired before a loan can be approved. This includes:
- Protect the security of the property
- Protect the health and safety of the occupants
- Correct physical conditions that affect structural integrity
After the appraisal inspection, the presence of certain items or conditions on or near the property may require additional inspections by qualified professionals. These items include:
- Ground water
- Toxic chemicals
- Inadequate surface drainage
- Radioactive materials
- Hazardous activities
- Potential damage from soil or other ground movements
- Excessive noise
- Other hazards or pollution
- Infestations or evidence of termites
- Structural failure
- Leaking or a worn roof
- Foundation damage
- Drainage problems
- Cracked masonry
- Inoperative or inadequate plumbing, heating or electrical
You should also be aware that in the event that any of these items or conditions are discovered on the property, your appraiser is not at liberty to recommend any party to perform these additional inspections. The best course of action is to inform your lender of the situation and have them take charge of arranging the additional inspections.
FHA Appraisals Are For Your Own Good
It’s in your best interest to cooperate during the appraisal process. Not only does an FHA-approved appraisal help you move more quickly toward your FHA-approved loan, it also helps to protect you from inheriting a nightmare in your new home.