If you plan to use an FHA loan to buy a house, or if you’re a seller entertaining an offer from such a buyer, you’ll eventually encounter the FHA home appraisal.
During this process, a licensed and HUD-approved home appraiser will evaluate the property to make sure it meets HUD’s minimum requirements, in terms of market value and overall condition.
How the FHA Home Appraisal Process Works (Basically)
Here’s a quick look at how FHA home appraisals works. Please note that this is a simplified version of what can, in some cases, become a complex process.
It usually works like this:
- The home buyers find a house they want to buy, so they make an offer to purchase it.
- The seller accepts the offer, putting the house “under contract.”
- The buyers give their mortgage lender a copy of the signed purchase agreement.
- The lender chooses a HUD-approved home appraiser to evaluate the property.
- The appraiser is primarily concerned with (A) the home’s market value, and (B) its overall condition.
- FHA appraisers must adhere to HUD guidelines, as well as the Uniform Standards of Professional Appraisal Practice (USPAP) when evaluating homes.
- The appraiser will determine the current market value based on recent sales prices for similar houses in the area.
- The appraiser will also inspect the home to make sure it meets HUD’s minimum property requirements.
- The appraiser will note any discrepancies and recommend corrective action.
- Minor issues can be resolved without impeding the loan process.
- Serious, uncorrectable discrepancies might cause the loan to fall through.
- After completing the process, the appraiser will file a “Uniform Residential Appraisal Report” (for single-family detached, attached, or semi-detached properties); or an “Individual Condominium Unit Appraisal Report,” if it’s a condo.
This is a basic overview of how an FHA home appraisal works. If you want to get into the nitty-gritty of this process, refer to Section II-B of the Single Family Housing Policy Handbook (also known as HUD Handbook 4000.1).
What HUD Says About It
The FHA home appraisal process is regulated by the Department of Housing and Urban Development (HUD). This is the parent department that oversees the Federal Housing Administration. Appraisal guidelines and property requirements are clearly laid out in HUD Handbook 4000.1. So it would be redundant to list them all here.
Here is what HUD says in the introduction to the appraisal section of the handbook:
“The appraisal process provides the Mortgagee [i.e., lender] with necessary information to determine if a property [being purchased] meets the minimum requirements and eligibility standards for a Federal Housing Administration (FHA)-insured Mortgage.”
So, as you can see, the FHA appraisal process is about more than just the value of the property. It’s a more thorough evaluation of the property, when compared to a standard home appraisal. So let’s talk about that next.
How FHA Appraisals Are Different from Conventional
Any time you use a mortgage loan to buy a house, you can rest assured there will be an appraisal. The lender will not close the deal until they have a pretty good idea what the home is actually worth in the current market. They determine this with an appraisal. This is true for both conventional and FHA-insured mortgage loans.
With that being said, there are some differences between an FHA home appraisal and a “regular” appraisal used for a conventional mortgage. One of the biggest differences is that the appraiser performs double duty when evaluating a home for an FHA-insured loan.
- With a conventional mortgage product, the appraiser is almost entirely focused on the market value of the home.
- With an FHA loan, the home appraiser is concerned with the market value. But he or she must also inspect the home for structural integrity, health and safety issues, functionality of installed systems, etc.
This is one of the key differences in how an FHA home appraisal works. It’s like an appraisal and an inspection all rolled into one.
Key Concept: The ‘Health and Safety’ of the Occupant
We’ve talked about the dual nature of the FHA property appraisal. The appraiser is concerned with the market value of the home, but he must also ensure there is nothing that will affect the health and safety of the new occupant (i.e., the home buyer).
This is a key concept of the FHA home appraisal. In fact, the phrase “health and safety” appears numerous times throughout the Single-Family Housing Policy Handbook. Anything that poses a health or safety hazard to the occupant (like a bedroom with no secondary egress for emergencies) could prevent the FHA loan from going through.
To learn more: Follow the “minimum property requirements” hyperlink above to learn more about this topic, or refer to HUD Handbook 4000.1.