A home appraisal is an estimate of the market value of a home. Since a third party performs the appraisal, the market value is not influenced by the buyer or the seller. Most mortgages and refinances have an appraisal as a basic requirement.
Lenders use the market value from the appraisal to determine the loan-to-value ratio of a mortgage. This estimate can prevent borrowers from borrowing more than the value of the property and prevent lenders from taking on extra risk with a loan.
The appraisal must demonstrate that the property complies with FHA property acceptability criteria standards set by the U.S. Department of Housing and Urban Development (HUD).
The two objectives of FHA appraisal standards make them special since they look for both minimum health and safety requirements as well as the property's value.
FHA home appraisals require two steps:
FHA appraisers visit properties in person to write notes and take photos. They check for the structures quality, the interior and exterior condition, the state of fixtures and systems and the condition of the lot.
Appraisers research selling prices for comparable homes by reviewing homes that closed in the same general area and typically closed during the past six months. They use their findings from the site visit to estimate the market value of the property.
FHA inspection checklist:
As mandated by FHA, the appraiser will examine various features of the property during the inspection. This checklist items make up the minimum eligibility requirements for an FHA-insured loan. Here is a list of the things an appraiser will be checking.
The property must be a single family home
The property must be free of hazards and conditions that pose a risk to the health and safety of the occupants or negatively impact the home's use and structural soundness
Must have an undamaged exterior, foundation and roof
Must have safe and reasonable property access
No loose wiring and exposed electrical systems
Must have all relevant utilities, including gas, electricity, water and sewage functioning properly - utilities must be on
The septic system must be functional
Must have a working, permanent heating system that can heat the property adequately
Mechanical systems must be safe, protected from destructive elements, functional, durable and of decent quality
Must have surfaces free of chipping or peeling lead-based paint - including out buildings
Must not have evidence of termites or other destructive organisms on the property
Must be easily accessible to vehicles - especially emergency vehicles
Presence of any defective conditions, including but not limited to, poor construction, leaks, decay - until the issues are resolved, a property with any defects is deemed unacceptable
Must have adequate access to attic spaces and natural ventilation in crawl spaces
Foundations must be in good condition
Additional health and safety hazards, including but not limited to, broken windows, blocked doors or steps without a handrail
Whether each room has a window or door to the exterior to be used as a fire escape
No presence of lead-based paint
Smoke detectors must be installed in every bedroom
A carbon monoxide detector must be installed if the home has any gas appliances including a hot water heater, stove or furnace
Utilities must be turned on
Guest house must have full living area with full bath, kitchen with stove and counters for food prep and heating
If the appraiser finds small problems, such as dripping faucets, cracked windows, missing handrails, etc., the seller can usually fix them without too much difficulty. The loan can still proceed as long as these modifications are completed before the appraiser returns for their final inspection.
However, on occasion, the appraiser might discover significant damage to the property and advise that repairs must be completed before you can move in. If the home has hazardous conditions, such as holes in the floor or a failing roof, you will likely be unable to close on your FHA loan until they’re repaired. If the idea of a lengthy repair process doesn’t interest you, you can look for other properties that meet FHA requirements.
Keep in mind that an FHA appraisal is for mortgage insurance purposes only and does not guarantee the condition of the home. All FHA home appraisals last for 180 days after issue. If more time is needed before signing the loan closing paperwork, the lender will need to verify the property value has not declined.
An FHA appraisal will also evaluate the properties market value to ensure the lender is able to resell the home in case the borrower defaults on the loan. This evaluation is considered for the economic life of the home. The economic life is determined by the following criteria:
The area the property is located in must be able to accommodate housing for families with lower income
Any negative aspects of the area do not endanger the health and safety of those who live in the home
The home can be resold to a similar buyer
The life of the home is perceived to be longer, or equal, to the loan term
The mortgage is viewed as an acceptable risk by the lender
FHA loans can be a great option for many borrowers. They are particularly popular with first-time home buyers because they make homeownership accessible for those who might not have a large down payment or have imperfect credit history.