What Is an Appraisal?
Let’s start with a quick definition. An appraisal is an expert assessment of a particular product or asset (in this case a house) to determine its value. Within the context of FHA loans, the purpose of the appraisal is to determine the market value of the home that is being purchased.
During this process, the appraiser will look at comparable properties that have sold recently, in the same area as the one being purchased. He will also visit the “subject house” and evaluate it both inside and out. After this review process, the appraiser will write a report to detail his findings. The report 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 and further action.
How the FHA Process Is Different from a ‘Regular’ Transaction
Home buyers and homeowners are often surprised to find that FHA appraisal guidelines include detailed instructions for inspecting the property. This is different from a standard appraisal, where the appraiser mainly wants to know what the house is worth. When a Federal Housing Administration home loan is being used, the appraiser basically has to perform double duty.
Here are the primary differences:
- Conventional: In a typical real estate transaction, where a conventional (non-government-insured) home loan is being used, the appraiser is mostly concerned with the current market value of the property in question. That is his primary objective when visiting the house. He is only concerned with the condition of the property as it relates to the value.
- FHA: When an FHA loan is being used, the appraiser has two objectives. The Department of Housing and Urban Development (HUD) requires him to determine the current market value, 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. This is the “double duty” mentioned earlier. It’s what makes the FHA appraisal process unique.
So the primary difference between FHA and regular appraisals is the level of inspection that is required by HUD. If the HUD-approved appraiser flags certain issues — such as peeling paint, loose handrails, or other safety issues — those issues must be corrected before the loan will be funded. In other words, the transaction will be put on “hold” until the discrepancies are resolved. That is not the case with a regular appraisal used for a conventional home loan.
Home buyers would be wise to have a complete “regular” home inspection separate from the “health-and-safety” inspection conducted by the FHA appraiser. HUD actually encourages this. All borrowers who use this program have to sign a disclosure that says, “I understand the importance of getting an independent home inspection. I have thought about this before I signed a contract with the seller for a home.”
To clarify: HUD requires an appraisal (with a built-in health-and-safety inspection). They do not require a regular home inspection — but they strongly encourage it. This is a source of common confusion among buyers and sellers alike.
Overview of FHA Appraisal Guidelines for 2017
According to the 2017 FHA appraisal guidelines, all properties being purchased with an FHA-insured mortgage loan must be appraised by a licensed, HUD-approved home appraiser.
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, or “comp,” used during the valuation.
- Take photos that show the grade of the lot, if it’s a proposed construction.
These are the minimum steps that must be performed during an FHA home appraisal.
What Does the Appraiser Look for?
So, what does the FHA appraiser look for during this process? The primary areas of inspection are the roof, the foundation, lot grade, ventilation, mechanical systems, heating, electricity, and crawl spaces (when present).
Here are some of the key inspection areas required by HUD:
- HUD’s primary concern is the health and safety of the home buyer who will actually live in the house. Thus, most of their appraisal / inspection checkpoints have to do with health and safety aspects of the property. Above all, the home must be habitable and comfortable, without any potential hazards to the occupant.
- The lot should be graded in a way that prevents moisture from entering the basement and/or foundation. In other words, the lot should be sloped to allow water to drain away from the house — not toward it.
- All bedrooms should have egress to the exterior, for reasons of fire safety. A bedroom window will suffice, as long as it’s large enough to allow egress.
- Many homes built before 1978 still contain lead-based paint, which is a potential health hazard. In these homes, the appraiser will check for damaged paint (peeling, chipping, etc.). Such conditions must be corrected before the loan will go through.
- All steps and stairways must have a handrail for safety. This is a commonly cited discrepancy during FHA appraisals.
- The heating system must be sufficient to create “healthful and comfortable living conditions” inside the home.
- The roof should be in a good state of repair and must keep moisture from entering the home. It should “provide reasonable future utility, durability and economy of maintenance.”
- The foundation should be in good repair and able to withstand “all normal loads imposed” on it.
According to HUD Handbook 4150.2, the home “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants.”
The bottom is that if something poses a threat to the health and safety of the occupant, or to the structure itself, it will probably be marked as “subject to repair.” This is the central theme that runs throughout the appraisal guidelines.
More: For a complete checklist of these and other appraisal requirements, refer to HUD Handbook 4150.2. You’ll find it on the HUD.gov website.
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. In fact, the health-and-safety aspects of the FHA appraisal have gotten a bit more relaxed over the years. Additionally, most discrepancies are fully correctable. If they are corrected before the final inspection (when the appraiser follows up on the hit list), the loan can still move forward.
In most cases, the only “deal breakers” 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 (i.e., a fixer-upper). In both of these cases, the discrepancies (A) create hazardous conditions and (B) cannot be easily fixed. These are the types of issues that send FHA loans off the track.
In most cases, however, flagged 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 deal can move forward.
The official FHA appraisal guidelines for 2017 state this clearly: “Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants.”
Where to Learn More: HUD Handbook 4150.2
Most of the information above was adapted from HUD Handbook 4150.2. You can find more information about HUD’s appraisal guidelines for FHA loans in this particular handbook. It’s available on the Department of Housing and Urban Development website, and also on the “HUD Guidelines” page of this website (look for that tab in the main menu above).
If you really want to learn more about these appraisal requirements — for instance, if you’re a licensed appraiser and you want to get approved by HUD to inspect FHA properties — you should refer to their “Mortgagee Letters & Handbook for Roster Appraisers.” This is a collection of letters and handbooks that explain all property requirements and inspection procedures.