How to Prepare for FHA Appraisal Requirements
Key Takeaways
- An FHA appraisal assesses your home's market value and condition to determine whether the home loan is a sound investment for the government to back.
- Your property will need to meet certain FHA inspection requirements during the appraisal process.
- An appraiser might list repairs that need to be made to make the home appraisal FHA-compliant.
Mortgage lenders require a home appraisal because they don't want to extend more financing than your new property is worth. When you buy a home using a mortgage insured by the Federal Housing Administration (FHA), the property must undergo an FHA appraisal to determine whether it meets certain requirements. These standards are generally designed to ensure that the property is safe, sound, and secure.
What Is an FHA Appraisal?
An FHA appraisal is a home appraisal that involves an FHA-approved professional evaluating a home to determine its market value. This step is required by lenders during the FHA mortgage process to ensure they're not lending more than the home is worth. The government also requires this evaluation to ensure that the FHA loan is a solid investment and that the home meets standards established by the U.S. Department of Housing and Urban Development (HUD).
Appraisal vs. Home Inspection
The FHA requires an appraisal — and so do many mortgage lenders for all kinds of loans, including conventional loans — while an inspection is an optional but highly recommended step. Appraisals offer an opinion of the home's value based on recently-sold, comparable properties. Inspections give buyers a sense of the home's condition and whether there's any major damage that might make it not worth purchasing.
How Does an FHA Appraisal Work?
An FHA appraiser will observe, analyze, and report on whether a property meets HUD's minimum property requirements. For new construction, the property must also meet minimum property standards. The FHA appraisal process typically looks like this:
Appraiser Visits
An FHA-approved, licensed appraiser visits the property to inspect its condition, including its interior, exterior, and surroundings.
Appraiser Gives an Opinion and Writes a Report
The appraiser takes photos to document the property's condition and completes a Uniform Residential Appraisal Report (or Condominium Unit Appraisal Report for condos). In addition to reviewing the home's condition, the appraiser provides the FHA with an opinion regarding the property's market value.
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 general, you can expect an FHA appraisal to be completed within a week.
FHA Appraisal Guidelines
During an FHA appraisal, the appraiser will examine both the local market and the property itself. While there's not much 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 FHA inspection requirements.
"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."
— Christopher Linsell, former real estate agent and director of content marketing, Elm Street Technology
Market Research
One of the first things 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.
- Two comparable home sales completed within 90 days
- Three recently closed sales in the same subdivision
- Two active listings 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 details a long list of conditions reviewed as part of the appraisal process, including physical features, utility and systems, and environment.
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:
No Issues
The home came through the appraisal well and you can move forward with the purchase.
Low Appraisal
The appraiser believes the home is not worth enough to secure the loan. The lender may still 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.
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. You may be able to provide evidence that the work's been completed, or your lender may want to order a second appraisal.
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.
What Happens If the FHA Appraisal Uncovers Problems?
"The appraisal will outline exactly what needs to be repaired for the appraisal to be FHA-compliant."
"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.' In that case, it's the buyer's responsibility to fix them."
— Ralph DiBugnara, President, Home QualifiedIn general, these repairs are expected to be completed before closing day. You may still be able to close on the home if you have a reason to delay the fixes, such as waiting until warmer weather to do outdoor repairs. Delayed repairs may require an extra escrow holdback that can be released once you complete all fixes recommended by the appraiser.
Tip: Consider an FHA 203(k) loan, which allows for financing the home purchase and the required repairs through a single mortgage. Borrowers can make various repairs using an FHA 203(k) loan, such as structural alterations, reconstruction, modernization, and elimination of health and safety hazards.
Key Takeaway
An FHA appraisal is more than a value check — it's a safety and condition review that can affect whether your deal closes. Ralph DiBugnara notes that the appraisal will spell out exactly what needs to be fixed, and that responsibility typically falls on the seller unless the PSA says otherwise. If repairs are needed, an FHA 203(k) loan can roll the purchase and renovation costs into one mortgage.
Originally published on Bankrate by Laura Vukelich · April 19, 2024.
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