Summary: This article explains the basic guidelines for FHA home appraisals. This information is relevant to both home buyers and sellers.
FHA loans have risen in popularity over the last few years. This is a direct result of the housing crisis that erupted in 2007 – 2008. During the housing boom of the early to mid 2000s, FHA market share was less than 5% of total mortgage generation. But in the wake of the housing crisis, the agency’s market share shot up to nearly 40%. This trend affects home buyers as well as sellers. As a result, it’s important to understand how this government-backed mortgage program works. In this article, and in the next few articles in this series, we will examine FHA home appraisal guidelines in particular.
But first, a quick definition:
An FHA home appraisal is both a process and a product. During the process, a licensed home appraiser evaluates the property to determine its current market value. The appraiser will then produce a written report that details his findings, including the estimated value of the home. Appraisals are typically required for mortgage approval. In order to issue a final approval on the loan, the lender must have the property appraised to determine its value.
The FHA loan program is managed by the Department of Housing and Urban Development (HUD). It is HUD that issues the guidelines and requirements for FHA appraisals and the appraisers who perform them. If you want to know exactly what the FHA appraiser will look for when visiting a property, you should read through HUD Handbook 4150.2. The title of this handbook is “Valuation Analysis for Single Family One- to Four- Unit Dwellings.”
I won’t repeat the entire handbook here. Instead, I’ll explain some of the basic appraisal requirements for FHA loans.
Measuring Market Value
The appraiser’s job is to determine the current market value of the home. What is market value? HUD defines it as…
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”
Remember, the Federal Housing Administration insures the lender against losses resulting from borrower default. So they need to ensure the home is worth the price the buyer has agreed to pay for it. The appraisal helps them determine the market value, based on current conditions within the local real estate market.
General FHA Appraisal Requirements
HUD issues the appraisal requirements for FHA loans. In chapter 3 of HUD handbook 4150.2, they’ve outlined the six key requirements for an FHA home appraisal. The following information has been adapted from the handbook:
- FHA home appraisers are required to make a “complete visual inspection” of the home being purchased. They must examine the home inside and out. As a result, the appraiser will need to be granted access to the property. This can be done by the homeowner, a real estate agent, or via lockbox.
- The appraiser is required to take photos of the entire exterior of the property. This includes the sides of the house, the front and rear of the property, and any improvements made to the property that might add value. Examples of value-adding improvements include patios, decks, swimming pools and the like.
- During an FHA appraisal, the home appraiser must also take photos of similar homes that have sold in the area recently. These are referred to as comparable sales, or “comps.” These photographs must be submitted with the final evaluation report. We will talk more about comparable sales in a latter installment of this article series. They are a key part of the FHA appraisal process.
- If the home is located in an area that is currently being developed (such as a new neighborhood), the appraiser must also include a map showing the proposed construction area, including roadways.
- The FHA appraisal report must include a copy of a street map showing the area where the home is located. The subject property must be clearly marked on the map, and so must all of the comparable sales that were used to support the home appraisal.
- If the property is a new construction that has not yet been built, the appraiser is required to take photos that show the grade of the vacant lot.
These are some of the basic requirements for FHA home appraisals. HUD Handbook 4150.2 goes into much more detail on these and other aspects of the home evaluation process.
This article is the first in a series of FHA loan updates. All of the information contained in this article is current as of March 2013. In the follow-up to this article, we will go into more depth on how appraisers analyze properties to determine their current market value.