FHA Appraisal Requirements and Guidelines | Bankrate

Mortgage lenders require an appraisal of each home they extend financing for. This is to ensure they aren’t lending too much money for a place that isn’t worth it.

An appraisal also comes into play if you’re a candidate for an FHA loan. If you plan to buy a home using a government-backed mortgage insured by the Federal Housing Administration (FHA), the property must go through an FHA appraisal to determine whether it meets certain standards and criteria. These standards, outlined by the U.S. Department of Housing and Urban Development (HUD) in its Single Family Housing Policy Handbook, are generally designed to ensure that the property is safe, sound and secure.

Here’s how to prepare for an FHA appraisal.

What is an FHA appraisal?

FHA mortgages are home loans that allow for a lower minimum credit score and down payment than many conventional loans. These loans are actually funded by a bank or other type of mortgage lender, but backed by the federal government. In order to purchase a home with this type of loan, the property must go through the FHA appraisal process.

“In order to back a mortgage, the government needs to make sure the loan is a sound investment, which is why they require a special FHA-specific appraisal,” says Christopher Linsell, a former real estate agent and director of content marketing at Elm Street Technology, which develops real estate software.

“This appraisal serves two purposes: The first is to assess the market value of the house. The government will want to ensure the loan amount they will be backing is equal to or less than the market value of the home. The second is that they will also want to assess the home’s condition, longevity and livability,” he adds.

It’s this dual purpose that distinguishes FHA appraisals from conventional-loan appraisals.  With the conventional variety, the appraiser assesses a home’s condition mainly to determine its worth — to verify that the purchase price dovetails with its fair market value, and the requested loan size.

FHA appraisers consider value, but they must also confirm that the home conforms to its minimum property requirements, which include safety and other issues: the absence of lead paint, properly functioning appliances, etc. This leads them to places a regular appraisal may not go: Attic or crawlspace inspections are required for FHA appraisals, for example, but not necessarily for conventional ones.

In a sense, an FHA appraisal is a combination of an appraisal and a home inspection (see box) that ascertains if the property has major defects or structural flaws. However, an FHA appraiser’s observations will generally be limited to readily observable conditions and are not the same as the comprehensive inspection performed by a licensed home inspector during the homebuying process.

Appraisal vs home inspection

While the FHA appraisal contains elements of a home inspection, generally an appraisal isn’t the same as a home inspection. One key difference between an appraisal and an inspection: The FHA requires an appraisal (and so do many mortgage lenders for all kinds of loans), while an inspection is an optional but highly recommended step homebuyers can elect to take. The other difference: An appraisal offers an opinion of the home’s value based on recently-sold, comparable properties. Put another way, it helps describe what a buyer might pay for the home given the state of the current market. An inspection, on the other hand, gives the buyer a sense of the condition of the home and whether there’s any major damage that might make it not worth purchasing. Unlike an appraisal, an inspection doesn’t assign the home a value or compare it to other properties.

How does an FHA appraisal work?

An FHA appraiser will observe, analyze and report on whether a property meets HUD’s “minimum property requirements.” In the case of new construction, the property must also meet “minimum property standards.”

As HUD’s Single Family Housing Policy Handbook explains, the minimum property requirements are FHA’s general requirements that all homes it insures be safe, sound and secure. The minimum property standards, on the other hand, address the specific regulatory requirements surrounding the safety, soundness and security of new construction.

New construction is defined by HUD as properties being built, proposed construction or properties that were built less than one year ago. Existing construction is a property that has been 100-percent complete for more than one year or, if it was completed less than one year ago, it was previously occupied.

The FHA appraisal process typically looks like this:

1. Appraiser visits – An FHA-approved, licensed appraiser visits the property to inspect its condition, including its interior, exterior and surroundings.
2. Appraiser gives opinion and writes report – The appraiser takes photos to document the property’s condition and, in the case of a single-family home, completes a form called the Uniform Residential Appraisal Report, which outlines the various features of the property. For a condominium, the appraiser will complete a Condominium Unit Appraisal Report. In addition to reviewing the home’s condition, the appraiser will provide the FHA with an opinion regarding the property’s market value.
3. Appraiser makes recommendations – If the property examination reveals issues that do not comply with HUD’s acceptability criteria, the appraiser indicates the exact repairs necessary and provides the approximate cost to fix the problems.

In some cases, an FHA appraiser is not able to determine whether a property truly meets HUD’s standards, and the mortgage lender might call upon another qualified inspector to review the property as well.

In general, you can expect an FHA appraisal to be completed within a week.

How much does an FHA appraisal cost?

An FHA appraisal costs an average of $300 to $425, according to HomeGuide. This is a typical range for non-FHA appraisals, as well.

The price will depend on the level of demand in your area, how far the appraiser has to travel, and the size of the house and lot.

FHA appraisal guidelines

During an FHA appraisal, the appraiser will examine both the local market and the property itself.

Market research

One of the first things that the appraiser will do is research the local residential real estate scene. One of the best ways to get information about the value of a home is to see what comparable properties have sold for recently.

Appraisers must cite some specific pieces of market research, including:

• Two comparable homes sales completed within 90 days
• Three recently closed sales in the same subdivision
• Two active listing or pending sales

FHA appraisal checklist

The appraiser will also look at the property itself when making an appraisal. HUD’s Single-Family Housing Policy Handbook, which is not easy reading for the average homebuyer, details a long list of conditions that will be reviewed as part of the appraisal process.

There are three major categories that impact the home’s value:

• Physical Features
  • Foundation. The inspector will look for major cracks or damage in the foundation. They’ll also check for whether the foundation is fully settled.
  • Roof. Does the roof leak or have loose shingles? Does the material meet local safety requirements?
  • Siding. The inspector will look for damage or wear to the siding, the protective veneer that covers the exterior walls.
  • Chimney. Chimneys are a frequent source of roof leaks and can pose a fire hazard if you don’t periodically clean them properly. The inspector will make sure the chimney is in good shape.
  • Lead paint. If a home has lead paint, that will need to be properly remediated before getting a loan.
  • Drywall. Is the drywall properly installed and are there signs of damage?
  • Defective construction. The inspector will look for any apparent problems or defects in how the home was built that could pose future danger.
  • Space. The inspector will ensure the home has adequate habitable interiors and environs.
• Utilities and Systems
  • Water. A home must have adequate access to clean, hot running water.
  • Electricity. The inspector will check that the electrical system is working and properly installed, and the wiring up to code.
  • Lighting. The inspector will confirm that there is adequate illumination in the home and that the lights work.
  • Sewage. A home must have a sanitary method of disposing of waste and sewage.
  • Pools. Swimming pools must be free of major defects or damage and have mandated safety features (fences, etc.).
  • Appliances. The inspector will will confirm that all appliances are in working order.
• Environment 
  • Pests. The inspector will examine the home for the presence of pests, such as termites, that can severely damage the home.
  • Power lines. Overhead or too-close heavy duty powerl ines could impact the livability of the home or pose a safety risk.
  • Noise. If the home is near a highway, major thoroughfare, railway or airport, the inspector will measure the noise and how it impacts the home’s value and livability.
  • Grading, drainage and dampness. The inspector will check to see if the home is excessively damp or moldy and will make sure it has proper drainage.
  • Soil. The inspector will check the soil for oil, contaminants or heavy metals.

While there’s not a lot a prospective buyer can do to get ready for an FHA appraisal, homeowners putting their house on the market can certainly do their homework to help ensure their property meets HUD criteria.

“As a property seller, the best way to prepare for an FHA appraisal is to visit HUD’s website and review the minimum property standards in order to make sure your home will pass that inspection,” says Linsell.

Next steps after an FHA appraisal

Once the FHA appraisal has been completed, the mortgage lender will review the report.

There are a few potential outcomes of an FHA appraisal:

• No issues. The home came through the appraisal well and you can move forward with the purchase.
• Low appraisal. The appraisal believes the home is not worth enough to secure the loan. The lender may still be willing to offer financing, but a smaller sum. At this point, you can back out of the deal, try to negotiate a lower purchase price, or come up with extra funds to reduce the size of the mortgage you need. Just keep in mind that if you nix the deal, you could lose your deposit if your contract didn’t include an appraisal contingency.
• Repairs required. If there are significant repairs required to make the home worth enough to secure the loan, the lender will likely ask for them to be addressed, based on the appraiser’s recommendations. Depending on their severity, you may be able to just provide evidence that the work’s been completed, or your lender may want to order a second appraisal to confirm the home’s new condition.
• Major hazards. Some hazards can be deal-breakers: Things that make the home unsafe to live in, like out-of-code gas or electric work or a majorly damaged foundation. The seller would need to agree to spend a large amount of money and time fixing these issues to get the deal to go through. If the seller does, you’ll definitely need to provide evidence of the completed repairs and the lender will order a second appraisal.

If the FHA appraisal uncovers problems

If there are issues, “the appraisal will outline exactly what needs to be repaired for the appraisal to be FHA-compliant,” Ralph DiBugnara, president of Home Qualified, a real estate industry platform. In general, these repairs are expected to be completed before closing.

In some cases, though, you may be able to close on the home anyway if you have a good reason for delaying the fixes (such as the home requiring external repairs in the middle of winter). You can work with your lender to request an escrow holdback. With a holdback, the lender collects additional money at closing to secure the loan, refunding it after an inspector confirms the repairs are complete.

Generally, the seller is responsible for repairs unless otherwise stated in the purchase and sale agreement (PSA). Some PSAs will stipulate that the property is being bought ‘as is,’” says DiBugnara. In that case, it’s the buyer’s responsibility to fix them.

Not all sellers will be willing to make repairs, however, which means that as the buyer, you may have to continue searching for an FHA-compliant property.

You also have the option of choosing an FHA 203(k) loan, which allows for financing both the purchase of the home and the required repairs through a single mortgage.  Borrowers can make a variety of repairs using an FHA 203(k) loan. These fixes include structural alterations, reconstruction, modernization and elimination of health and safety hazards.

One last option, if your income and credit score allow, is to purchase the home using a conventional mortgage. You’ll still have to have an appraisal, but the lender’s standards might be more forgiving (especially if you’re able to make a larger down payment).

FAQs about FHA appraisals

• How long is an FHA appraisal good for?

  In general, an FHA appraisal can be good for as long as six months, especially in a market where home values aren’t appreciating quickly.

  In a hotter market, an appraisal might only be good for three months before becoming outdated. If all goes well, you should be able to close within 30 or 45 days, well before the appraisal expires.

• When do I need an FHA appraisal?

  You need to get an FHA appraisal when using many types of FHA loans, including:

  • FHA purchase
  • FHA 203(k)
  • FHA cash-out refinance
  • FHA Reverse Mortgage (HECM)

  You can skip the FHA appraisal if you’re getting an FHA streamline refinance loan.

Bottom line on FHA appraisal requirements

An appraisal is a necessary step in the process of obtaining an FHA loan. Along with ensuring the home’s value is aligned with what the lender is willing to let you borrow, the appraisal also confirms the home meets FHA’s guidelines surrounding safety and habitability. If you’re the seller, you’ll need to be prepared to meet these criteria, or make repairs or negotiate price with with the buyer, if needed.