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FHA Appraisal Guidelines and Requirements

FHA Appraisal

Getting a home involves many steps, and understanding appraisals can be a critical part. In particular, FHA appraisals have their own set of rules. So, how long is an FHA appraisal good for, and what can you expect from the process? Let’s explore the FHA appraisal process, what appraisers look for, and what happens after an FHA appraisal.

How Do FHA Appraisals Work?

When you opt for an FHA loan to purchase your dream home, the appraisal process plays a pivotal role. It’s not just about finding out how much the home is worth, but also ensuring the property meets specific safety and quality standards. Let’s break down how these appraisals work a bit further.

What’s The Purpose Of An FHA Appraisal?

An FHA appraisal serves a dual purpose:

  • Valuation: First, it confirms the home’s market value. The lender needs to know that the amount of money you wish to borrow matches the actual worth of the home. This protects you from overpaying and the lender from over-lending.
  • Inspection for FHA Standards: Second, it checks that the home meets the FHA’s minimum property standards for health and safety. This isn’t about nitpicking every little flaw, but ensuring the home is safe, secure, and structurally sound. For example, the appraiser will check that the heating works, the roof doesn’t leak, and that there are no safety hazards like exposed wiring.

FHA Appraisal Vs. Home Inspection

It’s easy to mix up appraisals with home inspections since both involve evaluating the property. Here’s a quick breakdown of how they differ:

  • FHA Appraisal: An appraiser—an independent expert selected by the lender—conducts the FHA appraisal. The appraisal has two goals: determining the home’s market value and ensuring it meets FHA’s safety and health standards. This is a requirement when you’re using an FHA loan.
  • Home Inspection: This is a more in-depth examination of the home’s condition. A licensed home inspector looks at everything from the foundation to the roof, identifying potential issues that could cost you down the line. While not required by the FHA, getting a home inspection is a smart move for any buyer. It gives you a detailed report on what you’re buying into before the sale is final.

Understanding both of these processes helps you see the bigger picture. An appraisal protects your investment from a financial standpoint, making sure you’re not borrowing more than the home is worth and that your future home is up to safety standards. A home inspection, while separate, arms you with knowledge about the condition of your potential new home, allowing you to make an informed decision.

By grasping the nuances of FHA appraisals and how they differ from home inspections, you’re better prepared as you step into the world of home buying. It’s not just about finding the right home; it’s about making sure it’s the safe and secure investment you deserve.

How FHA Appraisers Assign A Home Value

When an FHA appraiser steps onto a property, they have a clear set of guidelines to follow to determine the home’s value. This process is crucial, as it influences the loan amount the lender will offer. Here’s how appraisers assign value during an FHA appraisal:

  • Comparative Market Analysis (CMA): The appraiser looks at similar homes in the area that have sold recently. These “comparables” help determine a fair market value by comparing things like size, condition, and features.
  • Condition and Features: The appraiser evaluates the home’s condition, upgrades, and features. Newer roofs, renovated kitchens, or other improvements can increase value, while issues like outdated systems or needed repairs might lower it.
  • Location: The location of the home affects its value. Homes in highly desirable neighborhoods, near good schools, or with excellent accessibility to amenities tend to appraise higher.

The appraiser combines these factors to assign a value that reflects the home’s worth in the current market. This ensures the lender is not providing a loan for more than the home’s value, which is a key component of mitigating risk in the mortgage lending process.

What FHA Appraisers Look For

An FHA appraiser performs a dual role: evaluating the home’s value and ensuring it meets HUD’s safety, security, and soundness standards. Their scrutiny covers several key areas:

Structural Integrity

The home must stand solid. Appraisers check the foundation, roof, walls, and floors for signs of damage or instability that might compromise the home’s structural integrity. They’re on the lookout for major issues like cracks in the foundation, missing roof shingles, or significant water damage.

Systems and Utilities

The functioning of essential systems is non-negotiable. This includes:

  • Electrical System: Safe, adequate, and up to code.
  • Plumbing: No leaks, adequate water pressure, and safe drinking water.
  • Heating and Cooling: Must be operational (season-dependent) and capable of maintaining comfortable living conditions.

Property Site

The property itself undergoes evaluation. The appraiser assesses:

  • Grading and Drainage: To prevent water from entering the home.
  • Hazards: From soil contamination to proximity to high-risk areas like flood zones or landslides.

Health and Safety Concerns

A primary focus is on identifying any conditions that could pose a risk to occupants:

  • Lead Paint: For homes built before 1978, any peeling, chipping, or cracking paint needs remediation to address potential lead hazards.
  • Mold and Mildew: Indications of mold or mildew can signal water problems and health risks.
  • Pest Infestations: Termites, rodents, or other infestations can compromise structural safety and health.

General Condition and Maintenance

Beyond specific concerns, the overall condition and maintenance of the home are assessed. This includes the condition of flooring, windows, doors, and paint. The idea is to ensure the home is well-maintained and won’t require immediate major repairs post-purchase.

Security

The home should provide a secure environment. This includes working locks on all doors and windows, secure and safe entrances, and other security features.

By closely examining these aspects of a property, an FHA appraiser ensures that a home is a safe, sound, and secure investment. This process is essential in not only protecting the buyer’s interests but also in safeguarding the lender’s investment by ensuring the property is worth the loan amount being borrowed.

What Comes After an FHA Appraisal?

Once the FHA appraisal is completed, several scenarios can unfold based on the findings of the appraisal. Understanding these possibilities can help you navigate your next steps confidently, whether you’re buying a home or refinancing.

The Home Sale Appraisal Comes Back Low

If the appraised value of the home is less than the sale price, it poses a challenge because the FHA will not approve a loan amount higher than the appraised value. Buyers have a few options in this situation:

  • Negotiate a Lower Price: You can ask the seller to lower the price to match the appraised value.
  • Make Up the Difference: If you’re committed to the purchase, you could pay the difference between the appraised value and the sale price out of pocket.
  • Walk Away: If neither of the above options is viable or the seller won’t negotiate, you may need to walk away from the sale, especially if your contract includes an appraisal contingency.

The Refinance Appraisal Comes Back Low

For those looking to refinance, a low appraisal can impact the loan terms:

  • Higher Costs: You might need to bring more cash to closing to keep your desired loan-to-value ratio.
  • Change in Terms: The lender may offer different terms than originally quoted, potentially including a higher interest rate.
  • Cancellation: In some cases, if the appraisal is too low, the refinance might not go through at all.

The Appraiser Requests Further Repairs

If the appraiser identifies health or safety issues, these repairs must be completed before the FHA loan can close. This might require further negotiation with the seller to address these issues, or you might need to cover the cost of necessary repairs.

The Appraisal Comes Back At Or Higher Than The Expected Amount

This is the best-case scenario. An appraisal that meets or exceeds the purchase price or desired refinance value means the loan process can continue smoothly, without the need for negotiation or additional financial outlay.

Each of these outcomes requires careful consideration and, often, swift action. Being well-prepared for any scenario can make the appraisal step of home buying or refinancing far less stressful.

FHA Inspection Checklist

While the FHA appraisal includes a review of the home’s condition, understanding the specific items on an appraiser’s checklist can help sellers prepare their homes for sale and buyers to know what to expect. Here’s a concise list of what an FHA appraisal might include:

  • Structural Integrity: Checking for foundational stability, roof condition, and solid floors and walls.
  • Systems and Utilities: Ensuring electrical, plumbing, and HVAC systems are functional and up to code.
  • Safety Features: Smoke detectors, carbon monoxide detectors, and safe, unobstructed egress.
  • Property Site: Proper grading for drainage, no environmental hazards.
  • General Maintenance: Assessing overall upkeep, including peeling paint (particularly in pre-1978 homes due to lead paint concerns), broken windows, and functioning doors.

This checklist underscores the FHA’s priority on health, safety, and security. By addressing these areas proactively, sellers can facilitate a smooth appraisal process, and buyers can feel confident in their investment.

FHA Appraisal And Inspection Requirements

Navigating the FHA appraisal and inspection process starts with understanding what’s expected. This knowledge can empower both sellers and buyers, ensuring the journey toward closing is as smooth as possible.

Preparing Your Home For An Appraisal Or Inspection

For sellers, making a good impression during the FHA appraisal is critical. Here are practical steps to prepare:

  • Ensure All Systems Work: Check that your HVAC, electrical, and plumbing systems are functional. Repair minor issues, like leaky faucets or faulty switches, before the appraiser visits.
  • Address Safety Hazards: From securing loose handrails to ensuring smoke detectors are functional, mitigating any safety hazards is a must.
  • Boost Curb Appeal: First impressions matter. Simple improvements like mowing the lawn, pruning bushes, and painting can make a big difference.
  • Declutter and Clean: A clean and clutter-free home allows the appraiser to focus on its structure and systems without distractions.
  • Document Improvements: Have paperwork ready for any major repairs or upgrades. This can help justify your home’s value.

For buyers, knowing these expectations can help you evaluate potential homes and understand the appraisal value later.

Safety Precautions

The FHA puts a strong emphasis on health and safety standards, and certain precautions are non-negotiable:

  • Lead-Based Paint: Homes built before 1978 must be inspected for lead-based paint; if found, it must be appropriately sealed or removed.
  • Access to Safe Drinking Water: The property must have access to potable water. Wells, if present, are subject to inspection and testing.
  • Functional Heating, Cooling, and Electrical Systems: These systems not only need to be operational but also safe and adequate for the home’s size.
  • Structural Soundness: The property must be free from any conditions that could endanger the occupants, including foundational issues, roof leaks, and significant pest infestations.

Meeting these requirements is crucial for a successful FHA appraisal and, ultimately, for closing on an FHA loan. By preparing in advance and addressing potential issues, both sellers and buyers can navigate this process more effectively.

The Bottom Line

FHA appraisals, while sometimes seen as a hurdle, are actually designed to protect all parties involved. For lenders, they ensure the loan amount is not more than the property’s value. For buyers, they help identify potential issues that could require costly repairs or pose safety risks.

Ultimately, understanding and preparing for an FHA appraisal and inspection can make the home buying process more transparent and less stressful. By knowing what to expect, you can address potential issues proactively, whether you’re selling or buying. And remember, the goal of these requirements is not to hinder but to safeguard your investment in a home that’s not only valuable but safe and secure for years to come.

FAQs

How many months is an FHA appraisal good for?

An FHA appraisal is valid for 120 days. This means that from the date the appraisal is completed, there is a 4-month window during which the appraisal can be used for loan closing. If a loan transaction doesn’t close within that period, a new appraisal may be required.

Can you reuse an FHA appraisal?

Yes, an FHA appraisal can be reused within its validity period of 120 days. However, it can only be reused for the same borrower and the same property. If either the buyer or the property changes, a new appraisal will be necessary.

How long is an FHA case number and appraisal good for?

An FHA case number, which is assigned to a property and borrower for an FHA loan, is aligned with the appraisal’s validity. This means it also holds validity for 120 days. If the loan does not close within that time frame, the case number and appraisal may no longer be usable for closing without additional steps or documentation.

How long is an FHA credit report good for?

An FHA credit report is valid for 120 days, just like the appraisal. For the loan to proceed without requiring a new credit check, the lending process must be completed within four months of the credit report being pulled. If the process extends beyond this period, a new credit report will need to be obtained to ensure the borrower’s financial situation has not significantly changed.

About The Author

Channing Moore

Channing is the owner of Bayou Mortgage. He is passionate about empowering people through education and training to own a home. In his spare time you can catch him at church, reading a book or working on his latest project.

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