If you opt for FHA financing when you purchase or refinance a home, you have to have an FHA appraisal conducted. This means that a HUD approved appraiser will conduct the appraisal. The reason the FHA requires a HUD appraiser to perform the job is because there are certain specific guidelines he must follow. In the case of the FHA loan, the appraisal is not a time to strictly come up with the right value for the home; it is also the time to determine if the home meets specific HUD guidelines to qualify for FHA financing.
What is the FHA Appraisal?
The FHA appraisal is a written report that a qualified appraiser creates after assessing the home and property you plan to purchase or refinance. The appraiser’s ultimate job is to come up with an appropriate value for the home so that the lender knows how much money they can lend the borrower. Typically, FHA loans allow for a maximum loan-to-value ratio of 97.5%, so the value of the home must meet the sales price or higher in order for you to qualify for FHA funding.
The appraiser does not look strictly at the home you plan to purchase or refinance. He also uses other “comparable homes” in your area. These are homes that sold within the last six months, usually and that have similar features to your home. The appraiser knows the necessary adjustments to make to the value of the home based on what your home does or does not have compared to the comparable properties. The appraiser will come to the house and go through every room as well as thoroughly examine the exterior of the property in order to come up with an appropriate value. Once the appraiser has all of the pertinent information, he creates his appraisal report and forwards it to the lender for their evaluation.
FHA Appraisal vs the Conventional Appraisal
There are some very specific differences when you compare the FHA appraisal vs the conventional appraisal, much to the surprise of many homebuyers. The FHA has much more specific guidelines that the appraisers must follow in order for the appraisal to work for FHA financing. The FHA appraisal is not just a valuation of the property, but an actual inspection to ensure that it meets all HUD codes. The appraiser typically works as an inspector alongside his duties to find the appropriate value for the home for FHA loans.
When an appraiser conducts a conventional appraisal, he looks at the condition of the property and compares it to the homes that recently sold in the area. He does not have specific codes to abide by or things to look for – he just needs to ensure that the value of the home reflects the condition of it. For example, if the home you plan to purchase is in “moderate” condition compared to the recent sales around it, there will be a decrease in the home’s value to adjust for the condition. If the home you plan to purchase has many upgrades and/or is in exceptional condition compared to the comparable properties around it, the subject’s value will increase. Everything the appraiser does for the conventional appraisal pertains to the home’s value.
When FHA appraisers conduct a valuation on a home for an FHA loan, they have two jobs. The first, just like the conventional appraisal is to determine the value of the property. They use the same routine including finding appropriate comparable properties in the area. In addition, however, the appraiser must condquct a formal inspection of the property. This is not a personal inspection like you would pay an inspector for to help you determine the things that are wrong with the home that you might want to negotiate with the seller, but rather an inspection to determine that the home meets all of HUD’s minimum requirements regarding the health and safety of the home.
The largest difference in the two types of appraisals is how the lender/FHA handles the appraisal. For example, if the appraiser found health or safety issues with the home, you would not be eligible to receive FHA financing on the home. If there were issues, such as a loose railing with a conventional appraisal, it might or might not be caught. If it was, the appraiser might slightly adjust the value of the home, but the financing would likely still go through because conventional loans do not have a specific code for determining the health and safety requirements of the home. If there is an obvious problem, such as a missing toilet or a hole in the wall, it would greatly impact both appraisal and the subsequent financing.
FHA Minimum Property Standards
Aside from the fact that only HUD approved appraisers can conduct the FHA appraisal, the appraisal must meet many other FHA appraisal guidelines:
- Every appliance in the home must work and be safe
- Any hazards the appraiser finds must be in the report
- The appraiser must have full access to the attic or crawl space by physically entering it and inspecting it
- The report must include a statement if the roof on the property has less than two years of life left in it
- The appraiser must visually and physically inspect the sump pump and report on its condition/operation abilities
- The appraiser must report on the noise level of any property located near an airport
- The appraiser must determine that the lot is sloped enough to avoid excessive moisture in the foundation and/or basement
- An inspection of all bedrooms should include the determination of an escape in the case of a fire (a bedroom window is enough)
- Peeling or damaged paint must be inspected, especially if it is an older home that could contain lead paint
- Every room in the home must have sufficient heat from the heating system in the home
- All handrails must be securely attached
- There should not be any exposed or damaged wires
- The roof should protect the property from moisture
- There cannot be more than 3 layers of roofing
- The water heater must meet all codes
- The property must have easy access to the street
- The property cannot be located near any serious hazards, such as power lines, TV towers, and gas or oil wells
- The property should not contain asbestos – if it does an asbestos professional will be needed
The good news is that the appraisal helps you determine if a house is safe and structurally sound for you and your family. It is not a way to avoid providing you with FHA financing, though. Typically, unless the issues pose a serious threat that cannot be rectified, the seller can fix the issues before the appraiser returns to go over the items he found that were wrong during the initial inspection. Once the safety and soundness issues do not exist, FHA funding can move forward.
FHA Appraisal Guidelines
In order for an FHA appraiser to conduct an FHA appraisal, he must follow the appropriate FHA appraisal guidelines in order to determine the appropriate value as well as the correct statement regarding the condition of the property.
- The appraiser must physically inspect the interior and exterior of the property
- There must be pictures that show the front, side and back of the property as well as pictures of any improvements made
- Pictures of each comparable sale used to determine the property’s value must be included
- Any proposed construction in the area must show proposed roadways
- A street map must accompany the appraisal with the location of the subject property and comparable sales clearly marked
Finding an FHA Appraiser
Because you must use an FHA appraiser for your FHA loan, you need an officially licensed appraiser that the FHA approved. The best way to find one is through the HUD website where you can enter as little as the state you live in and search that way. If you want to refine your results, you can enter specific information, such as the city or zip code of the property you plan to purchase. You can even enter an appraiser’s first and last name if there is someone specific you want to use for your appraisal to ensure that he/she is FHA approved.
A Low FHA Appraisal
In the real estate industry, it is the unfortunate truth that people receive a low FHA appraisal. Sometimes sellers get overzealous in their quest to make a profit and they price their home wrong. This issue is not as common with homes that a realtor markets since the realtor has a better idea of the value of homes in particular areas. People that sell their home without the help of a real estate agent, however, sometimes make this mistake. When the appraised value comes in lower than the agreed upon sales price, there is a problem. Essentially, you cannot secure FHA funding for that loan amount, so you have three options:
- Negotiate the sales price with the seller again. This time with the appraisal in hand, you can discuss the price to see if the seller will lower the asking price. Some sellers will see the error of their ways and adjust the price accordingly, while others will stick to their original price and not budge. In that case, you would have to move onto a different home.
- If you have enough money to make up the difference between the appraised value and the agreed upon sales price, you can pay the difference, securing a loan for the amount of the appraised value, minus the 3.5% down payment.
- Just walk away from the home and find a home that is worth the value the seller asks.
Do FHA Appraisals Expire?
Something every borrower should know about FHA appraisals is that they can expire – they are not good indefinitely. This is due to the market’s volatility and the many changes that can occur in a short amount of time. Generally, borrowers have 120 days from the date the appraiser performs the appraisal to close on their loan while using the same appraisal. You can see this date on the appraisal report itself.
There are some simple exceptions that may grant you an additional 30 days on your FHA appraisal expiration. These exceptions occur if you meet any of the following:
- You signed a sales contract before the appraisal expired
- You received approval for an FHA loan before the appraisal expired
In these cases, the loan must close within 150 days of the date of the appraisal as long as the FHA underwriter signs Form HUD-92900-LT, the FHA Loan Underwriting Transmittal Summary.
If you have an Appraisal Update Report completed as a result of the original appraisal expiring, you have an additional 120 days to close the loan. This gives you the original 120 days on the original appraisal as well as another 120 days with the Update Report. You may only have the appraisal updated once, though.
What is the FHA Appraisal Timeline?
It is nearly impossible to predict how long every FHA appraiser will take to complete an FHA appraisal. A simple timeline, however, is as follows:
- The appraiser schedules the valuation and inspection with the seller
- The appraiser conducts the visit to the home
- The appraiser visits the comparable properties to take pictures for the report
- The appraiser goes over all of the information to come up with a value and write a report on the condition of the property
- The report goes to the lender
How long an appraiser takes to complete this work depends on his workload, the schedule of the seller and the availability of comparable sales. Typically, most professionals complete the process in one week, but it can take longer if there are variables that affect the process along the way.
How Long does an FHA Appraisal Stay with the Property?
There are cases where a person pays for an FHA appraisal and has an FHA approval, but for one reason or another the funding falls through. If another buyer comes through and the seller accepts his bid that includes FHA financing, the original appraisal might still stand for underwriting purposes. The FHA states that if the original appraisal is still valid, which means it is within the 120 days from the date of the inspection, the original appraisal stands. If you are outside of the effective date of the original appraisal, you can order a new FHA appraisal.
Disputing an FHA Appraisal
There are times when an FHA appraisal does not come back at the value you and the seller assumed it would and it destroys your ability to secure FHA financing. The good news is that you can entertain the thought of disputing an FHA appraisal, but you have to do so under the following guidelines:
- You must have a valid reason, such as the comparable properties are not equivalent or there are distinct errors in the report
- You must be able to provide ample proof to support your claims
- You should visually point out the mistakes on the report to submit to the lender
- Include any photos that may help your case
You submit all of the necessary information to your lender who will start the appeal process for you. The lender starts with the appraiser. If he does not agree that there are any issues with the appraisal, the lender can continue disputing an FHA appraisal with the FHA themselves.
Transferring an FHA Appraisal
There are times when you need to switch lenders. Whether you change because you found a lower rate or better closing costs at another lender or you lost your approval at a specific lender, everything needs to switch over including your appraisal. The good news is that you do not need to pay for another appraisal – only one fee per borrower is allowed. The other good news is that transferring an FHA appraisal is rather simple and must be completed within 5 business days of the request.
It is the lender’s responsibility to transfer the appraisal over to the new lender. Nothing else needs to be done, including the fact that you do not need to have the appraisal rewritten in the new lender’s name. The original appraisal sticks to the property for four months, so the appraisal is good no matter what as long as you are within that timeframe. The only time anything needs to change in the appraisal is if you are transferring an FHA appraisal to a different borrower. At this point, the appraiser can charge a new and the appraisal will be in the new borrower’s name.
FHA 203K Appraisal Requirements
A unique program that the FHA offers is the FHA 203K loan. This program offers you the ability to not only purchase a home with only 3.5% down, but also to have funds to fix up the home. This could mean making repairs that make a home reach HUD’s code or simply to make cosmetic changes to make the house a home to you. Whatever the case may be, there are different FHA 203K appraisal requirements that you must understand before going through the process.
First and foremost, you will see two values on your FHA 203K appraisal – an “as is” value and an “after repair” value. The first value is the one you will see on any appraisal – this is the number lenders use to determine if you are eligible to receive the loan amount you applied to receive based on the sales price you agreed on or the amount of money you owe on the mortgage you wish to refinance. The after repair value is the projected value the appraiser comes up with based on the repairs/changes you plan to make and their subsequent costs from the contractors you secure bids from.
In order to qualify for 203K financing, the “as is” value of the appraisal must meet the agreed upon sales price in the sales contract. If the appraised value comes in lower, the lender might require you to renegotiate the sales price with the seller in order for the two numbers to match. In some rare cases, the lender will use the “as is” value that the lender came up with as the value for the home with or without the sales contract.
The same process goes down for a 203K refinance. If you have an outstanding mortgage on the home now, the lender can choose to use that outstanding balance as the value or the “as is” value. Generally, the lender will choose the lower value between the two to use.
Once the appraiser determines the initial value, he then has to determine the projected value after all repairs are complete. This requires information from the contractor to help the appraiser determine the changes you will make and the costs involved. The appraiser will look at the work that is involved in the process as well as the value they will provide to the home. The appraiser figures the final value based on comparable sales in the area that have similar upgrades that you intend to make to the home.
Once you go through the process of bidding with various contractors and choose one to do the work, the list of those improvements and coinciding costs will get passed along to the appraiser. This way he can determine the amount of work being done and how it affects the future value of the home. There is some leeway in the amount you can borrow based on the appraised value, however, as most lenders allow up to 110% of the future value of the home for a 203K loan.
The Most Recent Changes to the FHA Appraisal
Now that you know what an FHA appraisal entails, you should know that there were changes that took place in September 2015 regarding the requirements for the report. Most of the changes pertain to how the appraiser writes the report rather than how appraisals are conducted. One of the most important considerations is the fact that appraisers are not inspectors; the “inspection” they perform is more of an observation rather than an inspection. The FHA highly recommends that any borrower pays for an independent inspection to ensure that there is nothing seriously wrong with the home that could cause unexpected expenses down the road.
In addition, the following changes occurred:
- All comparable photos must be taken from a side angle so that the photo includes the front and back of the property, just as the subject property photos require
- If there is any legal nonconforming zoning on the property, the appraiser must determine if it can be improved in the future
- The appraiser must have access to the preliminary title report
- Appraisers need to inspect full attics if they are finished, but they are not required to physically inspect the area if they are not finished as that is too risky for the appraiser
- The appraisal becomes subjected to a professional roofer if the appraiser determines there is less than 2 years of life left in the existing roof
- The appraiser must consider all three appraisal approaches, including the standard Sales Comparison method, Cost and Income method. The appraiser can use his own judgment to determine which method is best for the subject property.
- Notification of a non-working sump pump must be made
The FHA appraisal has many different nuances than a conventional appraisal, but most of it is for the protection of the borrower. If you find out that there are major issues with the home, you have the option to renegotiate with the seller or back out of the purchase altogether. While it might seem like a deal breaker in most cases, it is meant to help you in the long run. It is also a way for the FHA to protect themselves since they insure every FHA loan that banks fund. This way no one ends up financially distraught and you end up with a home that is safe and sound to purchase.