If you’re getting an FHA loan, you’ll need to get an appraisal in most cases. An FHA appraisal both establishes the value of the property and makes sure it’s safe for the homeowner or prospective homeowner.
The article below will explain exactly how the FHA appraisal process works, help you create an actionable checklist, talk about the aftermath and then discuss the next steps.
What Is An FHA Loan?
FHA loans are government loans backed by the Federal Housing Administration, or FHA, which operates under the Department of Housing and Urban Development, or HUD. These types of home loans offer lower down payments and more flexible credit requirements than a conventional mortgage. However, qualifying for an FHA loan requires a borrower and property to meet certain criteria, and as mentioned above, a home must be appraised and inspected by an FHA-approved appraiser.
How FHA Appraisals Work
An FHA appraisal, and really any home appraisal, has two primary purposes: providing a value for your home and doing some basic safety inspections. There are some special things that may happen with an FHA appraisal, but the process isn’t fundamentally different from any other mortgage.
We’ll go deeper on exactly how this works in subsequent sections, but property is assigned a value to make sure that the lender isn’t making a loan for more than the property is worth. The reasoning for this is that if you default on the loan, your lender has to try to sell the property to get as much money as they can for the investors in your loan. No one goes in thinking that’s going to happen, but mortgage investors plan for worst-case scenarios.
If you’re a home buyer, the valuation also prevents you from overpaying for your home. You’ll know exactly the current market value of the home.
The safety checks have to do with whether the property is move-in ready. If there are exposed floorboards or the utilities don’t work, that can be a health and safety issue. We’ll get into some FHA specific standards a little bit below.
FHA Appraisal Vs. Home Inspection
Before we go any further, two things that are commonly confused are an appraisal and an inspection. A home appraisal involves putting a value on a property and a basic safety inspection. It’s used to make sure that the loan-to-value ratio (LTV) after you buy the property represents an acceptable risk for the lender and the FHA as the mortgage investor.
By contrast, a home inspection is a thorough examination of a property you’re looking at buying to identify any potential issues so that you’ll know its condition and see if you’re personally comfortable with it. A home inspection includes checking all major systems and any appliances that may be included in the sale, as well as the home’s roof. If necessary, it’s also possible to get specialized inspections for things like septic systems and chimneys.
Assigning A Home Value
The primary function of an appraiser is to assign a fair market value to your home. In order to do this, they first take a look at the condition of your home as well as its amenities. After that inspection is complete, they look for comparable recent sales of similar properties, or “comps.”
“Similar” is a key word there. In order to be considered comparable, four-bedroom colonial homes are compared with other four-bedroom colonials. You wouldn’t compare it to a three-bedroom ranch property.
Comps are also typically judged against homes in the same – or very nearby – neighborhoods. There’s a little leeway in areas where homes are spaced farther apart, but that’s the exception rather than the rule. There are often up to three comparable properties used.
Based on this assessment, the appraiser puts all that information together and assigns a fair market value to the property.
What Do FHA Appraisers Look For?
Beyond the value of the property, an appraiser has to be on alert for anything that affects the health and safety of the people who live in the home or calls into question the structural integrity of the property. They’re also looking for anything that would have a negative impact on normal use of the property or its ability to be marketed for future sale.
From a health and safety perspective, and appraiser is looking for issues surrounding:
- Hazardous materials
- Toxic substances
- Damaged or defective asbestos
- Problems with insulation
- Radon gas
Additionally, there are restrictions on the location of power lines, and the FHA doesn’t do loans on properties within 300 feet of a tank containing more than 1,000 gallons of flammable or explosive material. If you’re in Hawaii, there are restrictions on getting loans for houses in certain lava flow zones.
The last thing specific to FHA loans is that there is a regulation related to homes built before January 1, 1979, when lead paint was used in construction. If there’s chipped or peeling paint, it needs to be remedied, with solutions including but not limited to one of the following:
- New paint
- Priming the area
- Treatment on wood surfaces
- Siding installation
- Other remedies that protect the surface from the elements
FHA Appraisal And Inspection Requirements
If you’re looking for steps you can take to improve your chances of success in the months, weeks and days leading up to your home appraisal, you can review our appraisal checklist to help you get ready. The good news is you’re not required to do a whole lot on the day of the appraisal. The appraiser does the hard work.
The one thing you’re going to want to really make sure of is that they have access to the areas they need to check out. It doesn’t hurt to tidy up your house. Your home should never be appraised based on cleanliness, but there should be clear walkways to get between rooms and such.
If you have pets who don’t handle strangers well, consider leaving them in their crate or having a trusted friend or family member watch them for a few hours.
Finally, there’s the pandemic corollary, because there is no playbook for what we’re living through. Don’t be alarmed if an appraiser uses personal protective equipment or asks you to mask up/keep a distance. They may decide that it’s better if you walk through the house with them flipping switches and switching on the tap than for the appraiser coming in as an outsider and touching everything in your house.
What Happens After An FHA Appraisal
For the following sections, let’s take a look at the process through the eyes of a potential home buyer named Casey. Every situation is different but depending on the volume of work being handled by the appraisal management company, the difficulty of doing the appraisal and finding comparable properties, Casey should expect to have the appraisal report back within a few business days. This section will go over the various scenarios that can come up.
The Appraisal Comes Back Low
For our first scenario, let’s assume Casey has offered $380,000, had the offer accepted and the appraisal comes back at $360,000. Because the bank won’t approve a loan for more than the home is worth, there are two options:
- If the seller is amenable, they might lower the price to what it appraises for, particularly if they’re motivated to move on. Otherwise, you can renegotiate. If you do this, you have to bring whatever the difference is between the appraised value and the final purchase price to the closing table in addition to your down payment and other closing costs. You might be able to avoid the back and forth haggling by putting a clause in your purchase agreement that says you’ll pay a specific amount above the appraised value up to a certain dollar figure.
- If the seller is unwilling to budge on the price or you can’t come to an agreement, you may be left with no choice but to walk away. If that happens, you’ll need to make sure that you have an appraisal contingency in your purchase agreement. The appraisal contingency gives you the power to renegotiate and walk away if the appraisal comes back low. If you don’t have this contingency, you could lose your earnest money deposit. An earnest money deposit is an amount of money put in escrow representing a promise that you’re taking the final steps to secure financing to buy the property. In order to retain your deposit when you walk away, you have to be moving on due to a contingency defined in the agreement.
The Appraiser Requests Further Repairs
Now, let’s take a scenario where Casey has fallen in love with a home, but it needs some electrical work done in order to be brought up to code and the appraiser is requiring the repairs be completed for the transaction to close. Ideally, Casey can negotiate to have the seller pay for the repairs, but if that’s not feasible, a buyer is allowed to pay for the repairs as well.
In general, repairs that are about the safety and livability of the property will have to be completed before the transaction closes. In certain cases, you can work with your mortgage lender to complete the process post-close via an escrow holdback.
In an escrow holdback, a portion of the loan funds are set aside to pay for repairs that can be completed later, but don’t impact safety. Examples include sod, gutters, deck, driveway and pest treatment.
The Appraisal Comes Back At Or Higher Than The Purchase Price
If the appraisal comes back at least as high as you agreed to pay in your purchase agreement, this is the best possible scenario. You just move forward with your transaction.
How long is an FHA appraisal good for?
In general, FHA appraisals are good for up to 120 days. In some instances, an appraiser can recertify the value if they agree to do so before the original appraisal expires.
What won’t pass an FHA inspection?
The FHA is most concerned with issues that affect the safety and livability of the property. So if anything major happens that could affect the safety or health of an occupant, the appraisal is failed and the issues need to be rectified before the mortgage can close. This could be anything from exposed floorboards, missing handrails to chipping paint in a house built before January 1, 1979.
How much does an FHA home appraisal cost?
An FHA home appraisal is paid for by the buyer. It’s not something you can shop for because your lender orders the appraisal through an independent third-party appraisal management company. The cost depends on a variety of factors including how far an appraiser would have to travel to get your location, how big the house is and how much land there is to cover.
The cost of an appraisal can either be paid for as part of your deposit with a lender or your closing costs, but the fee is typically $300 – $500.
How long does it take after an appraisal to close on an FHA loan?
The time it takes to close on a house varies. Refinances tend to close faster than purchases because sometimes you don’t need an appraisal and there’s not the same level of title work. Depending on the type of loan you’re applying for, there can be more or less documentation involved.
Most lenders will give you the option to lock your rate for as long as 60 days in order to complete the process for a fee. It’s important to note that things will be cheaper the faster you can close in many cases. If your lender asks for paperwork, be as prompt as you can be in order to expedite the process.
The Bottom Line: FHA Appraisals Protect Both Lenders And Buyers
Like all real estate appraisals, the aim of an FHA appraisal is to establish the safety of a home as well as its value. This is contrasted with a home inspection which doesn’t assign a value, but does a deep dive on the condition of the home and potential issues.
In addition to assessing your home’s value by comparing it to similar properties, the FHA appraisal process includes a safety check for hazards like mold, utilities not working and lead paint, among other things. If you’re looking to prepare for an FHA appraisal, the most important thing to remember is that all areas of your house should be easily accessible.
If an appraisal comes back low, you can renegotiate or walk away. If you do the latter, be sure you have an appraisal contingency so that you can get your earnest money deposit back.