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:

• Appraiser visits - An FHA-approved, licensed appraiser visits the property to inspect its condition, including its interior, exterior and surroundings.
• Appraiser gives opinion and writes report - The appraiser takes photos to document the property's condition and, in the case of a single-family home, completes a form called the Uniform Residential Appraisal Report, which outlines the various features of the property. For a condominium, the appraiser will complete a Condominium Unit Appraisal Report. In addition to reviewing the home's condition, the appraiser will provide 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 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.

During an FHA appraisal, the appraiser will examine both the local market and the property itself.

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:

• Two comparable homes sales completed within 90 days
• Three recently closed sales in the same subdivision
• Two active listing 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, 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

• Foundation. The inspector will look for major cracks or damage in the foundation. They'll also check for whether the foundation is fully settled.
• Roof. Does the roof leak or have loose shingles? Does the material meet local safety requirements?
• Siding. The inspector will look for damage or wear to the siding, the protective veneer that covers the exterior walls.
• Chimney. Chimneys are a frequent source of roof leaks and can pose a fire hazard if you don't periodically clean them properly. The inspector will make sure the chimney is in good shape.
• Lead paint. If a home has lead paint, that will need to be properly remediated before getting a loan.
• Drywall. Is the drywall properly installed and are there signs of damage?
• Defective construction. The inspector will look for any apparent problems or defects in how the home was built that could pose future danger.
• Space. The inspector will ensure the home has adequate habitable interiors and environs.

2. Utilities and Systems

• Water. A home must have adequate access to clean, hot running water.
• Electricity. The inspector will check that the electrical system is working and properly installed, and the wiring up to code.
• Lighting. The inspector will confirm that there is adequate illumination in the home and that the lights work.
• Sewage. A home must have a sanitary method of disposing of waste and sewage.
• Pools. Swimming pools must be free of major defects or damage and have mandated safety features (fences, etc.).
• Appliances. The inspector will will confirm that all appliances are in working order.

3. Environment

• Pests. The inspector will examine the home for the presence of pests, such as termites, that can severely damage the home.
• Power lines. Overhead or too-close heavy duty powerl ines could impact the livability of the home or pose a safety risk.
• Noise. If the home is near a highway, major thoroughfare, railway or airport, the inspector will measure the noise and how it impacts the home's value and livability.
• Grading, drainage and dampness. The inspector will check to see if the home is excessively damp or moldy and will make sure it has proper drainage.
• Soil. The inspector will check the soil for oil, contaminants or heavy metals.

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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