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.
[READ: Today’s FHA Mortgage Rates]
What Is an FHA Appraisal?
An FHA appraisal is a report on the value of a property that a homebuyer is hoping to purchase with an FHA loan. The lender orders an FHA appraisal from an independent appraiser approved by the FHA. FHA appraisals are considered more rigorous than conventional mortgage appraisals because they focus on safety and security in addition to the property’s market value.
Why Do You Need an FHA Appraisal?
Appraisals are required for most types of mortgages. They give the lender insight into the state of the home you’re buying and help confirm that the property has sufficient value to serve as collateral for your mortgage.
Because FHA loans are backed by the Federal Housing Administration, lenders have to follow the agency’s guidelines for appraisals. Lenders must use FHA-approved appraisers, and the appraisal must establish the property value and confirm that the home meets the FHA’s minimum property specifications. 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, the agency recommends that you also 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.]
FHA Appraisal Checklist
Running through a checklist can help you figure out if an FHA appraisal is likely to uncover problems with a home.
— Is it safe to enter and exit the property?
— Are there problems with the roof or foundation?
— Are there any electrical hazards?
— Do any appliances or utilities not work correctly?
— Are water and heating supplied to the home?
— Is it possible to access the attic and crawl spaces?
— Are crawl spaces clear, with enough ventilation?
— Is there damage from termites?
— Are there threats to health or safety, such as mold, asbestos or lead?
If a property is in disrepair, it may have glaring flaws that signal it won’t pass an FHA appraisal in its current condition. FHA appraisal red flags include:
— Chipped or peeling paint
— Broken windows or windows that are painted shut
— Staircases without handrails
— Exposed wires
— Water damage in basements or crawl spaces
— Cracks in the foundation
— Earth-to-wood contact for the home or garage
An FHA appraisal can point out problems ranging from structural deficits to 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.
[READ: FHA First-Time Homebuyer Loans: What You Need to Know.]
How Does an FHA Appraisal Work?
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. Other lenders work with an appraisal management company, which manages its own pool of appraisers. When the company receives an appraisal order from a lender, it assigns an appraiser to the job.
The appraiser goes to the property, examines it and takes photos. They then complete research to estimate what the home is worth. 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 appraiser usually sends the appraisal to the lender in about two weeks, although in remote areas, the process can take longer.
Once an appraisal is submitted to the lender, it goes through an underwriting process. It’s reviewed by the lender’s in-house underwriters to make sure it follows the FHA appraisal 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.
The homebuyer is often required to pay for the appraisal up front. 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 extends the appraisal so that it’s good for one year.
[See: Best Low- and No-Down-Payment Mortgages]
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. All FHA home purchases must have an amendatory clause. This clause becomes part of your purchase contract and must be signed by all buyers, sellers and agents. It requires the seller to refund your earnest money and let you out of the deal if the home appraises for less than the purchase price.
Repairs Needed
The appraisal may present a list of required repairs. 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.
Another option, if the repair cost doesn’t exceed $5,000, is completing the purchase with an FHA escrow holdback. This can be helpful when the sellers can’t afford to do the repairs up front. With an escrow holdback, some of the proceeds of the sale are held in an escrow account. After closing, the FHA lender uses the account to pay contractors for completing the repairs. Repairs with a holdback must be completed within 30 days of the close of escrow.
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. In that case, they may choose to call off the transaction.
For repairs costing at least $5,000, the buyer could get an FHA 203(k) loan to cover the purchase plus the additional cost of rehabbing the home. If you use a 203(k) loan to purchase and rehab a home, your maximum loan amount is based on either the value of the property before rehabilitation plus the cost of rehabilitation, or 110% of the appraised value of the property after rehabilitation — whichever is less.
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What Is an FHA Appraisal? originally appeared on usnews.com
Update 05/22/25: This story was previously published at an earlier date and has been updated with new information.
