The FHA loan is a mortgage loan insured by the Federal Housing Administration (FHA) that aims to provide aspiring homeowners with a secure pathway to financing, making homeownership dreams more accessible and achievable.
FHA Appraisal Guidelines
To obtain an FHA loan, the home you are interested in must undergo an appraisal. The appraisal ensures that the selling price matches the market value and that the home meets the FHA's minimum property standards for safety, security, and soundness.
All FHA loan types require an appraisal, including purchase, refinance, and reverse mortgages.
The only FHA loan product that does not require an appraisal is the FHA Streamline Refinance.
FHA-approved appraisers complete FHA appraisals and act as independent third parties, providing an unbiased property evaluation.
FHA Appraisal Requirements Checklist
The FHA has minimum property standards, which guide appraisers when they are evaluating a home. These standards are designed to protect the health and safety of the occupants, ensure the property is structurally sound, and ensure that the property is a good risk for FHA insurance.
FHA Appraisers follow very specific guidelines to determine whether a house is up to code, but here’s a general checklist of what they’re looking for:
House Structure
- That there are no cracks, settlement, or shifting in the foundation.
- Walls lack signs of severe cracking, bowing, or leaning.
- Roof structure is uncompromised and shows no signs of sagging, widespread leaks, rotting rafters, or inadequate support.
- No property framing issues exist, like damaged or deteriorated load-bearing beams, joists, or trusses.
Utilities & Safety Features
- Essential utilities such as water, electricity, and heating/cooling systems work properly.
- Presence of smoke detectors and carbon monoxide detectors.
Property Size & Zoning
- Property size and zoning comply with local regulations.
Home Accessibility
- The home has proper entry and exit points and adequate vehicular access.
Comparable Sales
- Recent comparable sales in the area help determine the property's market value.
Environmental Factors
- Potential environmental issues such as flood zones, soil contamination, or other hazards.
- Any evidence of pest infestation, such as termites or other damaging organisms.
Please note that this checklist provides a general overview, and the specific requirements and guidelines for FHA appraisals may vary.
What won't pass an FHA appraisal?
Common issues that may cause a property to fail an FHA appraisal include:
- Significant structural problems
- Peeling paint
- Safety hazards like exposed wiring or lack of smoke detectors
- Extensive water damage or mold
- Pest infestations
- Inadequate utilities
- Environmental hazards such as flood zones or soil contamination
- Non-compliance with building codes
- Zoning or size issues that don't meet residential use requirements
FHA Appraisal Timeline
The appraiser will spend anywhere from 45 minutes to several hours evaluating a home. Once the appraisal has taken place, the report is usually complete within 7 to 10 business days.
The appraisal process involves:
- Scheduling the appraisal appointment
- The appraiser visiting the property to conduct the home appraisal
- The appraiser prepares the report and submits it to the lender for review and consideration
It's important to note that the timeline can be affected by factors such as the property's location, property type (e.g., single-family home versus multi-unit property), and any potential issues or complications that may arise during the appraisal process. Keep in close contact with your agent and lender for an accurate update.
Do FHA loans require inspections?
While FHA loans do require an appraisal to assess the property's condition and value, they do not have a mandatory requirement for a separate home inspection.
However, sometimes FHA appraisers include orders for inspections in their appraisal reports if they would like further inspection of a particular aspect of the property.
Home inspections are also highly recommended to give buyers a more comprehensive evaluation of the property's overall condition. Home inspections can help buyers make informed decisions about the property, assist in price negotiations, and identify potential issues or repairs beyond what is covered by the FHA's minimum property standards.
FHA Appraisal Frequently Asked Questions
How long is an FHA appraisal good for?
An FHA appraisal is valid for 180 days (approximately six months) from the effective date of the appraisal report.
Who pays for the FHA appraisal?
The borrower is responsible for paying for the FHA appraisal. The appraisal fee may be an upfront cost or wrapped into closing costs, depending on the lender.
How much does an FHA appraisal cost?
FHA home appraisals typically average between $300 and $600. The specific amount will vary depending on the property's location, size, and complexity.
What if the FHA appraisal fails?
If an FHA appraisal fails, meaning that the property does not meet the FHA's minimum property standards, the borrower typically has a few options to consider:
- Renegotiate with the seller: The borrower can negotiate to address the issues identified in the appraisal. This could involve requesting repairs or adjustments to the purchase price to reflect the property's condition.
- Request a reconsideration of value: If the appraisal's value is lower than expected, the borrower can provide additional supporting documentation, such as recent comparable sales or information on property improvements, to the lender and request a reconsideration of the appraised value.
- Appeal the appraisal: In some cases, borrowers may appeal the appraisal if they believe the appraiser made errors or have additional evidence to support a different value. The lender can guide the borrower on the appeal process and requirements.
- Walk away from the transaction: If the borrower and seller cannot reach an agreement, the borrower can terminate the transaction and look for an alternative property or loan option. The FHA Amendatory Clause covers this option and protects any earnest money the borrower may have put down.
Specific options available may depend on the terms of the purchase agreement, the lender's policies, and the willingness of the seller to negotiate.
What happens if the FHA appraisal is lower than the purchase price?
Buyers have a few options if a house appraises for less than the selling price for an FHA loan. The lender will only approve a loan for the appraised value or the selling price, whichever is lower. So if the appraised value is lower, the borrower can cover the difference between the selling price and the appraised value out of pocket or negotiate a lower selling price. If an agreement cannot be reached, the buyer may opt out of the transaction and resume the house hunting process without penalty, as covered by the FHA Amendatory Clause.
What is the FHA Appraisal Waiver Contingency?
The FHA appraisal waiver contingency refers to a clause or condition in a purchase agreement that allows the buyer to back out of the transaction if the property does not require an FHA appraisal. This contingency is typically included when the buyer intends to use FHA financing, but for some reason, the property is eligible for an appraisal waiver.
Some lenders may grant an appraisal waiver or automated underwriting system if specific criteria are met, such as the property being in a low-risk category or having sufficient market data to support its value without an appraisal.
The FHA appraisal waiver contingency protects the buyer, allowing them to terminate the contract if an appraisal waiver is granted and they are uncomfortable proceeding without the traditional appraisal process.
The FHA Flip Rule and Second Appraisal Requirement
The FHA flip rule and the requirement for a second appraisal are related to certain restrictions on financing recently sold or flipped properties.
Under the FHA flip rule, if a property is being resold within 90 days of its acquisition by the seller, the lender may require a second appraisal. The purpose of the second appraisal is to provide additional assurance regarding the property's value and to ensure that no fraudulent activities or inflated values are involved in the transaction.
The second appraisal is typically ordered at the expense of the seller or the party responsible for the property's acquisition and subsequent resale. The second appraisal must be conducted by a different FHA-approved appraiser than who led the initial appraisal.
Under certain circumstances, the requirement for a second appraisal may be waived, such as when the resale price is within a specific threshold compared to the seller's acquisition cost.
How is a FHA 203(k) Appraisal Different?
An FHA 203(k) rehab loan is a mortgage that combines the financing for purchasing or refinancing a home with the funds needed for repairs or renovations, allowing borrowers to address property improvements in a single loan.
The FHA 203(k) rehab loan appraisal process involves several steps. First, a licensed appraiser assesses the property's "as-is value" and determines its projected value after the proposed renovations. The appraiser also evaluates the scope of work for the upgrades and ensures they comply with FHA guidelines. The lender then uses the appraisal report to determine the loan amount, including the cost of repairs, and establishes an escrow account to hold the funds for the renovations. Once the loan is approved, the borrower can proceed with the purchase and commence the renovation process while adhering to the guidelines outlined in the appraisal report.
