This Article Is About FHA Home Appraisal Guidelines And Property Standard Requirements
FHA insured mortgage loans are mortgage loans that are insured by the Federal Housing Administration (FHA). FHA is not a lender.
- The United States Department of Housing and Urban Development (HUD) is the parent of FHA
- The role of FHA is to guarantee FHA Loans originated and funded by banks and private lenders
- FHA Loans that default are guaranteed against losses by HUD
- As long as the lender is a HUD Approved lender and followed all HUD Guidelines when originating the FHA Loans, the lender will be guaranteed the loss due to a borrower defaulting and foreclosing on their FHA Loans
Role Of FHA And HUD Guidelines
- In order to originate FHA loans, the lender needs to be a HUD registered mortgage lender
- FHA loans make homeownership possible to first time home buyers or home buyers who have less than perfect credit
- Borrowers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure can qualify for FHA Loans
- Borrowers can qualify for FHA Home Loans with 580 credit scores with a 3.5% down payment
- FHA loans are one of the easiest mortgage programs available in the United States
- In order to qualify for an FHA loan, the home appraisal need to meet and qualify HUD mortgage lending guidelines
- One of those guidelines is that the subject property needs an FHA Home Appraisal
Two things that are the most important factors in an FHA Home Appraisal is that the home’s value appraises out and that the home is secure and habitable.
FHA Home Appraisal Versus Conventional Appraisals: Value, Safety, Security
FHA loans require the borrower to have a 580 credit score and require a 3.5% down payment and will lend up to 96.5% of the appraised value.
- In the event, if the home does not appraise out, then the home buyer needs to pay for the difference
- For example, if the buyer is purchasing a home for $150,000 and the FHA Home Appraisal comes out to only $100,000, the lender will only lend 96.5% of the appraised value or $96,500
- Buyer needs to come up with the difference
- On the flip side, if the buyer is purchasing a home for $100,000 and the FHA Home Appraisal is $150,000, the lender will lend borrowers 96.5% of the purchase price
- on this case will be $96,500
FHA Home Appraisal Basics
An FHA Home Appraisal is very similar to a conventional appraisal.
- FHA Appraisers use the sales comparison approach
- The sales comparison approach is where the appraiser uses the recent sale prices of similar and like homes within one mile or less distance from the subject property
- FHA Appraisers also use the cost approach appraisal method which is derived on how much it will cost to build the same property
The focus of an FHA Appraisal is not just getting the right value to protect the lender’s collateral but also to make sure that the home is secure and habitable.
- The FHA appraisal will note all the items deemed not safe and not habitable
- The home needs to be free from broken windows, loose wiring, leaky roofs, peeling paint, and foundation damages
- Realtors Worry About FHA Appraisal
Many veteran realtors advise their sellers not to accept a buyer who is planning on getting an FHA insured mortgage loan because they remember the days where they had knit picky FHA appraisers.
- FHA Appraisal process has gone through many changes and an FHA appraisal is not as tough as they used to be
- Many lenders can waive certain repair items noted by the appraiser as long as they are minor items such as a leaky faucet or minor broken windows
- An older roof is fine as long as the roof longevity is at least 3 years
- Fuse boxes are fine too as long as the house does not have any building violations
FHA Appraisals Are Stuck With The Home
Once the lender orders the FHA appraisal on a subject property but gets a low value, that value will be with the subject property for a period of 120 days.
- With conventional appraisals, in the event, if home buyers get a low appraisal and lender will not allow getting another appraisal so the property can get a higher value
- Borrowers can change lenders and can order a new conventional appraisal
- However, that is not the case with an FHA appraisal
The FHA appraisal is stuck with the home for a period of 120 days.
Properties That Appraise Below Purchase Price
If the lender representing the home buyer knows that the FHA Appraisal is undervalued and has comparable sales to justify it, the lender can do two things:
- Do an FHA Appraisal Rebuttal
- Order a new FHA Appraisal
Appraisal Rebuttals are often very difficult unless there are strong comparable sales. If the appraiser will not change the value of an existing FHA Appraisal with solid comparable sales, the lender can order a new FHA Home Appraisal. However, the borrower cannot pay for the second appraisal. The lender needs to pay for the second FHA Appraisal.