FHA Appraisals: An Overview

FHA Appraisals Follow Additional Guidelines

FHA Appraisals are performed by approved FHA Appraisers.
FHA Appraisals are required for property that will be purchased with an FHA loan.

FHA loans are mortgages used to buy homes where the mortgage insurance on the loan is provided by the FHA (Federal Housing Administration).

The FHA mortgage insurance provides lenders with protection against losses that are the result of borrowers defaulting (failing to pay) on their mortgage loans.

Property Inspections and FHA Appraisals

If you are buying property with an FHA loan, you need to understand the difference between a property inspection and an FHA home appraisal. Also, you should know that the FHA doesn’t actually make loans, it insures them.

The FHA appraisal requirements help ensure that the loans written by lenders meet the requirements for the FHA to insure the loan.

The FHA will insure loans on single family homes, owner-occupied homes of up to 4 units (multi-family housing), and manufactured homes that meet the requirements established by the FHA.

Homes are not qualified before they are under contract (i.e., you can’t find an “FHA pre-approved home”, although some condominiums are on an FHA-eligible list).

Please also read the FHA Appraisal Guidelines for property condition information for FHA underwriting (loan approval).

During the contract period that you have for completing the requirements to complete your home purchase, you will need:

A property inspection (so that you understand clearly the condition of the property and can either accept it as-is, or negotiate changes in the purchase contract), and

An FHA Appraisal.

The FHA Appraisal is not a Home Inspection

The FHA appraisal is not a home inspection (although it is sometimes erroneously referred to as the FHA home inspection), and it does not guarantee that the home is in perfect condition. The FHA does not require you to have a home inspection but you should never, ever buy property without one!

Please note that The Department of Housing and Urban Development (HUD) makes no warranties as to the value or the condition of an FHA Appraised property.

The buyers of the property (borrowers for the FHA loan) must determine for themselves that the property is in a condition that they consider to be acceptable, and that the price they are paying for the property is reasonable.

The Property Inspection

The property inspection, which you and your real estate agent must arrange (and you will pay for at the time of inspection), will be performed during your Option Period in Texas. The Option Period is a time frame of (usually) 7 to 10 days at the beginning of your contract period that you have to investigate the condition of the property.

The primary purpose of a home inspection is:

To assess the condition of the physical structure of the home (is it falling down? Is the roof leaking? Should the foundation be inspected?).

To gauge the remaining useful life of the building and mechanical systems such as the plumbing, HVAC (A/C and furnace) and electrical.

To identify and quantify potential problems with the building and the mechanical systems and itemize items that may need to be repaired and/or replaced either immediately (for safety reasons), or as soon as feasible to prevent further deterioration.

You need to carefully review the results of the inspection and negotiate any changes to the contract (i.e. repairs) before the expiration of the Option Period based on the newly discovered conditions of the property that weren’t apparent when the original contract was signed.

The FHA Appraisal

The FHA appraisal happens after the Option Period, once you have decided to follow through on your intentions to purchase the home and are arranging your FHA financing. The appraisal determines whether or not the Market Value of the property satisfies the lender’s requirements for underwriting (i.e., issuing) the loan. (If the property didn’t pass your own requirements for condition during the optional-but-not-really-optional home inspection, you shouldn’t move forward with your purchase.)

Although the borrower pays the appraisal fee, the appraisal is for the benefit of the lender. For an appraisal to be accepted for an FHA loan, it must be ordered by the lender and performed by an FHA Appraiser. The consumer (aka, buyer or borrower) does not order the appraisal.

Appraisals Help Determine Risk

Lenders use property appraisals in determining the amount of risk involved in making a loan on a piece of property.

The FHA appraisal provides the lender with the FHA Appraiser’s opinion of the Fair Market Value of the property and details the market activity in the area where the property is located.

This market activity includes data on recent comparable sales (homes that have sold that are similar to the property being appraised) as well as the number of similar properties that are currently for sale and how long they have been on the market.

The lender’s underwriting department reviews the appraisal reports and compares the results to their criteria (FHA loan criteria) for lending for home purchases.

Safe and Sound

Although HUD makes no warranties as to the condition of a home, it does take active steps to see that a home is in a “safe, sound and sanitary” condition.

The FHA appraiser is expected to require repairs for conditions of the property that preclude or impact the safe, sound and sanitary habitation of the property.

After the initial appraisal, if repairs are required, the lender will receive a list of repairs that are required before the property meets the requirements for an FHA loan.

This list will be provided to the real estate agents who will then negotiate on behalf of their clients for the repairs.

If the owner (seller) of the property is unable or unwilling to make the repairs, the property will not meet the lender’s requirements for making the loan and the contract will terminate.