There are many steps to the home-buying process. If you’re taking out an FHA loan (a loan backed by the Federal Housing Authority) to buy a property, you’ll most likely need to get an appraisal to verify the value and condition of the home. Let’s take a closer look at how FHA appraisals work, what to expect from FHA loan inspection requirements, and how to prepare, particularly if you’re a first-time homebuyer and have never been through the process before.
Table of Contents
Key Points
• An FHA loan appraisal evaluates a home’s market value and ensures it meets the FHA’s minimum property standards.
• FHA appraisals are not the same as a traditional home inspection.
• The appraisal involves a site visit to inspect the property’s condition and market research on comparable local home sales to determine value.
• Issues that can cause an FHA appraisal to fail include severe structural damage, roof problems, exposed wiring, and health hazards like lead-based paint or radon.
• If an appraisal comes back low or the home requires repairs, the seller may lower the price or make repairs, or the buyer may renegotiate or use a different financing option.
Understanding FHA Appraisals and Inspections
An FHA loan appraisal is an in-person assessment performed by an accredited appraiser. The purpose of the appraisal is to evaluate how much a house is worth and determine if it meets minimum safety and livability standards. The appraisal is sent to the lender for further evaluation before a FHA loan can be approved. FHA appraisals are typically required whether the borrower is buying or refinancing a home with an FHA loan. A buyer might meet all the other FHA loan requirements but an FHA appraisal is still needed in order for a loan to get the green light.
FHA Inspections vs. Appraisals
The appraiser only factors in readily observable conditions. A home inspection, by comparison, is much more in-depth in its assessment of a property’s need for repairs. Does the FHA require inspection of the home by a home inspector? No. An FHA appraisal may pick up some problems an inspector might see. But many homebuyers still order a traditional home inspection alongside their FHA appraisal.
Besides the property value, the FHA appraisal requirements evaluated during an FHA appraisal include the safety, security, and soundness of a home. In other words, the home should be safe for occupants to inhabit, protect the security of the property, and not have physical deficiencies or conditions impacting the structural integrity and ability to market it for future sale.
Appraisers are required to describe the property conditions, including any renovations, necessary repairs, or deterioration. Minor issues, such as missing handrails, cracked windows, or worn countertops, do not require automatic repair.
Differences Between FHA and Conventional Appraisal
Whether a borrower is seeking an FHA loan or a conventional loan, a home appraisal estimates the fair market value of a home based on the property condition and nearby home values. But FHA loans must meet the minimum standards set by the U.S. Department of Housing and Urban Development (HUD). This means that FHA appraisal requirements also consider the health and safety of the property, while conventional appraisals focus on the property’s value and condition. So in a sense, while the process is technically an appraisal, there are FHA loan inspection requirements that must be met. FHA lenders may require that any health and safety hazards be addressed before approving the mortgage.
FHA appraisers follow HUD guidelines for minimum property standards. During the appraisal, they analyze and report a property’s physical and economic characteristics to provide an opinion of its value. HUD requires FHA appraisers to have state certification and meet the minimum certification criteria issued by the Appraiser Qualification Board.
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How Do FHA Appraisals Work?
An FHA loan appraisal involves two steps. The appraiser will complete a site visit to inspect the property condition and perform market research for comparable homes in the area to estimate the market value of the home.
The appraiser will inspect the home’s interior and exterior to determine the property’s safety and soundness. The appraiser’s findings, plus information on the home like square footage and the year it was built, are cataloged in HUD’s Uniform Residential Appraisal Report.
To estimate the property’s value, the appraiser evaluates the selling prices for comparable homes in the same area that were recently sold. This information, combined with the property’s condition and characteristics, is used to estimate the market value.
Recommended: The Ultimate Home Inspection Checklist
What’s the Purpose of an FHA Appraisal?
FHA appraisals are required by lenders to ensure that the loan amount doesn’t exceed the market value of the property. The appraisal process is also used to determine that a property meets FHA standards for health and safety.
Safety and Structural Standards
In terms of occupant health and safety, the FHA appraisal looks out for exposure to hazardous materials, such as lead paint and asbestos. Mold, radon gas, and poor insulation are other potential safety risks that would be flagged in an appraisal. The overall property structure needs to be in sufficient condition to keep occupants safe. This means that damage to the foundation, structural decay, or anything that impacts the long-term integrity of the home would not meet FHA requirements.
Compliance with Minimum Property Standards (MPS)
FHA appraisals follow the Minimum Property Standards (MPS) set by HUD. The MPS establishes baseline conditions to cover aspects of a property that aren’t met by model building codes. For example, the MPS covers doors, gutters, and wall coverings to ensure the property value is not impacted by the quality of these components.
What to Expect from an FHA Appraisal
Being prepared for an FHA appraisal can help streamline the loan application and homebuying process. Here’s what to expect from FHA appraisal guidelines:
Appraisal Timeline and Duration
The duration of an FHA appraisal site visit varies by property size and condition, but plan for it to take between one and several hours to complete. The full appraisal report is usually complete within a week.
Common Issues That Can Affect the Appraisal Outcome
There are a number of issues and property conditions that the FHA requires to be remedied for loan approval. Some common FHA loan appraisal requirements that could trigger problems include:
• Roof condition or damage
• Exposed wires
• Water heater temperature and pressure relief valve
• Damaged foundation
• Peeling paint (for homes built before 1978)
Conditions That Won’t Pass FHA Inspection
It’s important to know what won’t meet FHA loan inspection requirements. Any property conditions that impact the safety and health of occupants could need to be addressed in order to get FHA loan approval. Besides the common issues outlined above, hazards, nuisances, and obstructions to property access could fail to pass FHA inspection. For example, the level of traffic or proximity to a hazardous waste site could violate FHA standards.
Ultimately, the property valuation accounts for the home condition, square footage, any renovations, and the number of bedrooms and bathrooms. The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the property.
FHA Inspection Requirements Checklist
Sellers can plan ahead and fix what won’t pass FHA inspection to avoid delays and improve the marketability of their home. Here’s how to address some common issues that could cause a property to fail an FHA appraisal.
• Roof repair: Fix leaks and consider a new roof if life expectancy is less than three years.
• Chipped or peeling paint: Scrape and repaint peeling surfaces if property was built prior to 1978.
• Water heater: Ensure the water heater has a pressure and temperature relief valve and sufficient piping.
• Plumbing: Repair all toilets, showers, and sinks that aren’t in working order as leaky plumbing won’t pass FHA inspection.
Both the inspection and the home’s appraised value are critical to FHA loan approval. Sellers and their real estate agents are permitted to communicate with an appraiser to offer additional property information that can contribute to the valuation of the home. Gathering documentation beforehand on any home improvements can ensure the appraiser has everything needed for an accurate valuation.
Recommended: What Are the Most Common Home Repair Costs?
What Happens After an FHA Appraisal?
The FHA appraisal report will provide the estimated market value and outline any required repairs or alterations that need to be completed for FHA loan approval.
What to Do if the Home Sale Appraisal Comes Back Low
If an FHA appraisal comes back low, there are several possible scenarios. The seller can lower the sale price to accommodate the appraised value. Alternatively, the buyer can renegotiate to lower the price and potentially contribute a larger down payment to cover the portion of the home price that is not covered by the FHA loan. As a last resort, a buyer would be permitted to walk away from the deal if the FHA lender’s requirements can’t be met.
What to Do if the Refinance Appraisal Comes Back Low
If refinancing with a FHA loan and the appraisal comes back low, there are a few courses of action available to borrowers. First, review the appraisal report to see if an appraiser missed anything important. If so, providing the correct information to get another appraisal could result in a higher appraised value.
If disputing the appraisal isn’t an option or successful, borrowers can consider restructuring the loan to take less cash out. Finally, the loan can be denied if the terms are not beneficial to the borrower.
What to Do if the Appraiser Requests Further Repairs
The appraisal may identify repairs that need to be completed to close on the loan. Unless otherwise outlined in the purchase and sale agreement, sellers are typically on the hook for repairs. The sellers have up to 120 days to make necessary repairs and meet FHA standards if required by a lender.
Alternatively, buyers can pay for the repairs themselves. If the issues impact the health, safety, and livability of the property, they’ll need to be completed prior to closing. Other non-safety repairs can be completed after closing. Note that delayed repairs may require an extra escrow holdback for the estimated costs.
Once repairs and issues have been addressed, the property can be reassessed. Borrowers can consider a FHA 203(k) loan to finance both the purchase and rehabilitation costs through a single loan if the repairs are an obstacle to closing. Buyers might consider renegotiating their offer to reflect the repair costs being financed.
If appraisal-related issues are delaying closing, buyers can consider a mortgage rate lock to secure their interest rate for a set period. This can help buy more time for repairs to be made without losing out on favorable loan terms.
What to Do if the Appraisal Comes Back at or Higher Than the Expected Amount
The loan simply moves forward if the appraisal comes back at or higher than the expected amount, barring any request for further repairs.
FHA appraisals are valid for 180 days unless it’s updated. If updated, an appraisal can be good for up to one year.
Recommended: FHA Loan Closing Cost Calculator
Impact of FHA Appraisal on Loan Approval
The FHA appraisal influences loan approval in two key ways. First, the appraisal evaluates the property condition and identifies if any repairs or further inspections are required for loan approval. Second, the appraised value determines the total loan amount a buyer is approved for. If the appraised value is lower than the purchase price on the contract, either a price reduction or larger down payment could fill the gap to get loan approval.
Repairs aside, how long can you wait after the appraisal to close on an FHA loan? It helps to understand how long an FHA appraisal is good for. Once the borrower and lender receive a copy of the FHA appraisal, it’s valid for 180 days.
A conditional approval from the lender will outline the required repairs to be made in order to close. After the appraisal is approved in underwriting, the loan will most likely be cleared to close. Prior to closing, borrowers will receive a mortgage closing disclosure which outlines the total funds needed to close.
💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.
The Takeaway
FHA appraisals estimate a property’s value and assess its condition to determine if it meets safety and livability standards set by HUD. Understanding the conditions and issues that won’t pass FHA inspection is important for buyers and sellers alike.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
Another perk: FHA loans are assumable mortgages!
FAQ
How does the appraised value affect the loan amount?
With FHA loans, the appraised value of the property determines the loan amount a borrower can qualify for.
Can you contest an FHA appraisal?
Yes, you can contest an FHA appraisal and provide additional information to inform the property valuation. However, there’s no guarantee that the appraiser will change the valuation.
What happens if the property doesn’t meet FHA requirements?
If a property doesn’t meet FHA requirements, buyers can ask the seller to make the necessary repairs. Alternatively, buyers can consider other types of home loans, such as a conventional mortgage.
How do FHA appraisals impact refinance applications?
If a home appraises for less than its owner thought it was worth, this could affect the ability to refinance, or the available loan amount for the refinance. Ultimately, a refi plan could be thrown off course by an unexpectedly low appraisal.
Is an FHA appraisal different for a new-construction home?
A new-construction home still has to meet the FHA’s requirements and standards. A key difference in the FHA appraisal process for new homes: If the home is 90% or less completed, the lender must provide the appraiser with a copy of the floor plan and other documents necessary to determine the size and quality level of the house. If construction is more than 90% complete, the lender must provide a list of what will be installed or completed after the inspection date.
How long is an FHA appraisal good for?
An FHA appraisal is valid for 180 days unless it’s updated. If updated, an appraisal can be good for up to one year.
Can an FHA appraisal affect interest rates?
An FHA appraisal won’t directly affect the interest rate you are offered for an FHA loan; however, if the home you wish to purchase appraises for less than the sale price, then the appraisal may affect your ability to obtain an FHA loan.
How long do you have after appraisal to close an FHA loan?
An FHA appraisal is good for 180 days and can be extended under certain conditions. But buyers typically close within 30 to 45 days after the appraisal.
Photo credit: iStock/valentinrussanov
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