Home loans insured by FHA are a major portion of the new loan originations in the current residential market. About 30% of the new home buyers rely on FHA loans to purchase their new home. FHA home loans generally carry lower interest rates with easier qualifications when compared to conventional home loans.
Whether you are a buyer looking to seek FHA financing or a seller who wishes to make your home appealing for FHA buyers, it’s essential that you get an overview of the various factors taken into consideration during an FHA appraisal.
A good understanding of the FHA appraisal process can help you choose a property that meets all the FHA minimum property requirements to ensure a swift loan approval.
The appraisal process mandated by FHA guidelines plays a key role in the approval of a FHA loan. FHA appraisal requirements are also quite different from the standard residential appraisals. The primary differences between the conventional and FHA appraisals relate to the level of detail and scrutiny involved.
FHA appraisal guidelines have changed numerous times over the years.
Most of the changes that are currently in force were introduced via the HUD mortgagee letter 2005_ML-48.
Ordering the FHA Appraisal
Before the new rule that came into effect in February, 2010, FHA lenders were vested with the task of ordering the appraisal from an FHA-approved appraiser. Since the rule change, FHA randomly assigns an appraisal order to one of their approved appraisers active in the locality in which the property is located.
The primary objective of this newly introduced change is to reduce contact between the lender and the appraiser, thus reducing any undue influence. The current approval status of an appraiser assigned to perform your home valuation can be verified by using the appraiser search form on the HUD website.
The first and most important step in the FHA appraisal process involves a visit to the subject property. While an appraiser may consider issues related to safety and the soundness of the property, their primary role is to ensure that the property meets the FHA property requirements. For a deeper evaluation of all issues related to your property, consult a qualified home inspector and get a thorough home inspection.
An FHA appraisal, in addition to property value determination, will check whether the essential elements are in proper order. Issues related to the roof, ventilation, mold, radon, lead and sewage will also be given special emphasis. If an appraiser determines that any of the issues mentioned before, they may need to be fixed prior to loan approval.
After completing a walk-through of the property and noting down all the relevant inputs, an appraiser will get down to the task of determining the property value. There are three approaches to arrive at a property’s fair value. They are: the cost approach, comparable sales approach and income approach.
The cost approach will arrive at a property’s value based on how much it would cost to construct a similar property as the subject property at the current market rates.
The sales comparison approach involves comparing the subject property to the recent sales of similar properties within its close proximity. Additions or deductions may be made to the comparable sales if they are not exactly similar to the property being evaluated.
As the income approach is typically used for rental or investment properties, it’s not relevant for FHA loans.
Completed FHA Appraisal Report
Besides the property valuation analysis, an FHA appraiser is also required to collect additional documentation. Drawings of the interior layout, floor plan, location map along with exterior and interior photos, street view and pictures related to highlighted issues need to be included in their final report.
The assigned FHA loan number must also be included on the full 1004 report submitted by the appraiser.
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