FHA loans offer flexibility to borrowers with low credit scores and limited funds for a home down payment. But there’s one area where FHA lenders can’t be flexible: the appraisal. Any property that’s purchased with an FHA loan has to pass a detailed checklist and have its value assessed according to rules set by the Federal Housing Administration.
Why Do You Need an FHA Appraisal?
Before you sign on any type of mortgage, an appraisal is required. The appraisal gives the lender insight into the state of the home you’re buying and helps confirm that the home has sufficient value to serve as collateral for your mortgage.
Because FHA loans are backed by the Federal Housing Administration, lenders have to follow certain rules for appraisals set by this agency. Lenders must use FHA-approved appraisers, and the appraisal must confirm that the home meets the FHA’s minimum property requirements and determine its value and marketability. Many of the FHA’s standards relate to the safety of the home and are designed to protect consumers.
While an FHA appraisal can identify a variety of issues, you should still get a home inspection for a complete picture of the home’s condition. “Your home inspector is going to find a whole lot more things wrong with that house than the FHA appraiser will,” says Kevin Watson, middle Tennessee regional manager at Churchill Mortgage.
[Read: Best FHA Loans.]
What Does an FHA Appraiser Look For?
An FHA appraiser checks for deviations from the FHA’s minimum property requirements, such as:
— Zoning violations
— Natural hazards
— Broken appliances
— Faulty plumbing, heating or electrical systems
— A leaky roof, or a roof that’s likely to wear out within two years
— Problems with the home’s foundation or structure
— Peeling or lead paint
— Inaccessible attics or crawl spaces
An FHA appraisal may identify structural defects, but more often it points out minor repairs that are needed. “It’s good to know that, ‘Oh well, we do need a safety rail here,’ or, ‘Oh well, we do need to have an updated wiring system in our home,'” Watson says. “It could be that expansive, or it could be as small as, ‘We just need a new window.'”
An FHA appraisal also checks that the home’s systems function as intended. “So an air conditioner is not required, but if an air conditioner is there, it needs to work,” says Anna Smith, senior loan officer at Movement Mortgage.
And an FHA appraisal estimates what the home is worth on the open market. The appraiser is required to look at recent sales of similar properties nearby to arrive at a number. Thus, getting an appraisal done is more challenging for unique properties that don’t have much in common with other homes in the area. “If you have a round, half-in-the-ground barn and you can’t find a round, half-in-the-ground barn to compare it to, you’re going to have a hard time with that kind of appraisal for FHA,” Smith says.
The FHA Appraisal Process
The lender orders the appraisal using a system that’s set up to maintain the appraiser’s independence. “The good news is, as a loan officer, we can’t really have any influence on the appraised value, which is wonderful for you because you get a true value,” says Watson.
The lender might work with a panel of several appraisers. With this approach, the lender sends the order to the panel, and one of the appraisers accepts it.
Larger lenders tend to work with an appraisal management company. This company allows a lender to approve appraisers, then gives each appraisal order to one of them at random. “So it’s not an assignment by the bank. It’s simply picking out of a lottery,” Smith says.
The appraiser goes to the property, examines it and takes photos. They then complete their research and analysis over the next five to 10 business days, then send the report to the lender.
Once an appraisal is submitted to the lender, it typically goes through an underwriting process. It’s reviewed by in-house appraisers to make sure it follows the FHA guidelines and meets the lender’s standards. “If the appraiser does a really terrible job, the appraisal underwriter from the lending institution can actually just kick that appraisal out, refuse to accept it, and require another one or an update to be done,” Smith says.
Depending on the lender, you might be charged for the appraisal immediately or at closing. Sometimes, lenders offer promotions and may give you a credit to cover the cost.
An appraisal for a single-family home can cost between $500 and $750, although appraisals for homes that are large, unique or in remote areas may cost more. And appraising a luxury property is usually more expensive.
Timing can also affect the cost. “Sometimes if a customer wants to close in two weeks, we can do that, but we’re probably going to have to rush the appraisal, and that’s going to cost a little extra money to do just because of the rush,” Watson says.
An FHA appraisal is good for 180 days. If the appraisal expires, you can ask the appraiser to update it. The update is then valid for one year.
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What Happens After an FHA Appraisal
In the best-case scenario, an FHA appraisal doesn’t uncover any problems. That leaves you free to proceed with closing on the loan. But there are a few other possible outcomes of the appraisal.
Low Valuation
If the appraisal arrives at a value below the purchase price, the lender won’t issue a loan to cover the full price of the home. In that case, you may need to renegotiate the purchase price or bring more money to closing to cover the difference.
Repairs Needed
The appraisal may present a list of repairs that must be completed before closing. Because the seller still owns the home, it’s up to them to order the work, but the seller and buyer may negotiate who covers the cost. After the repairs are made, the appraiser has to reinspect the property, which typically entails a fee of $75 to $100.
Large-Scale Work Needed
If the appraisal finds serious flaws in the home’s condition — like unsafe wiring or a septic system that needs to be replaced — the cost could amount to tens of thousands of dollars.
One option is to remedy the issues. But the buyer and seller might not have the money to make the needed repairs, or they might be unable to reach an agreement on who will pay for them. They may choose to call off the transaction, or the buyer might apply for a conventional loan instead.
Alternatively, the buyer could get an FHA 203(k) loan to cover the purchase plus the additional cost of rehabbing the home, as long as the total amount needed isn’t above the loan limit for the location.
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What Is an FHA Appraisal? originally appeared on usnews.com
