What is an FHA appraisal? - FHA appraisal vs. Home Inspection - How does the FHA Appraisal work? FHA Appraisal Guidelines
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 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. 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. It’s this dual purpose that distinguishes FHA appraisals from conventional-loan appraisals.
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.
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 most lenders), 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. 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.
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.
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.
The FHA appraisal process typically looks like this:
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.
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:
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:
1. Physical Features
2. Utilities and Systems
3. Environment
There’s not a lot a prospective buyer can do to get ready for an FHA appraisal short of requesting these repairs as a condition of purchase.
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