FHA Appraisal vs Home Inspection
What Is the Difference between an FHA Appraisal and a Home Inspection?
When Congress created the Federal Housing Administration, part of the mission was to ensure that Americans had access to safe housing. For this reason, any home purchased using an FHA loan must meet minimum property standards. FHA appraisers check that a property meets these standards when performing their appraisal. An inspection performed by a home inspector is quite different. It is a complete inspection of the home, followed by a detailed report of the home's current condition.
A licensed appraiser approved by the FHA performs FHA appraisals. The primary purpose of an appraisal is to establish the fair market value of a home so that the lender knows the home is worth at least the purchase price. An appraiser does not look at the home from top to bottom. They do a general inspection only, but mainly focuses on the size of the home and the purchase price of comparable homes in the area which have sold within the prior six months. Their secondary concern is the condition of the home in reference to very specific issues.
FHA-insured properties must be safe, sanitary and structurally sound to meet minimum property standards set out in FHA guidelines. If a home does not meet FHA minimum property standards, the FHA will not supply mortgage insurance for the loan. Since the loan is contingent on the FHA supplying insurance, the lender will not approve the mortgage until the seller brings the home up to FHA standards, the appraiser reinspects it and it passes. Unless a home has a major issue that makes it unsafe, unsound or unsanitary, the FHA is unconcerned with the condition of the house. (see below)
A home inspector has an obligation to inform his customer, the potential buyer, everything about the condition of the home, from simple things like ripped carpet or leaky faucets to major roofing or plumbing issues. Just because minor issues may not affect the safety of a home it does not mean they are not costly to repair. A potential buyer could find out from an inspection report that the home is not in the condition she believed it was in, and she may change her mind about continuing with the purchase. For this reason, many home purchase contracts contain special language that makes the contract contingent on the findings of a home inspection and allow for negotiation of repair costs or purchase price.
A home inspector also inspects major systems like heating and air systems or hot water heaters and appliances for their condition. To do this, a home inspector goes up on the roof, crawls through crawlspaces and goes into attic spaces. If an inspector finds that the roof of a home or an air compressor is not performing to a minimum standard they note it in a written report. At that point, the potential buyer could decide not to purchase the home at the negotiated price.
Specific FHA Standards
FHA-insured properties must be safe, sanitary and structurally sound to meet minimum property standards set out in FHA guidelines. If a home does not meet FHA minimum property standards, the FHA will not supply mortgage insurance for the loan. Since the loan is contingent on the FHA supplying insurance, the lender will not approve the mortgage until the seller brings the home up to FHA standards, the it is reinspected and it passes. Unless a home has a major issue that makes it unsafe, unsound or unsanitary, the FHA is unconcerned with the condition of the house.
In December 2005 FHA made a number of changes to their requirements, allowing for "As Is" appraisals, even if minor defects to the property condition exist. FHA appraisals occurring on or after January 1, 2006 now only require repairs for conditions that rise above cosmetic defects, minor defects, or normal wear and tear. Appraisers must report ALL deficiencies but lenders can use professional judgment and prudent underwriting practices to determine when a property's condition is a threat to safety or jeopardizes structural integrity.
This is a list of examples that no longer require automatic repair to existing properties, but are not limited to:
- Missing handrails
- Cracked or damaged exit doors that are otherwise operable
- Cracked window glass
- Defective paint surfaces in homes built after 1978
- Minor plumbing leaks such as faucets
- Worn or soiled floor coverings or finish
- Rotten or worn out counter tops
- Damaged plaster or sheet rock or other wall and ceiling material on homes constructed after 1978
- Poor workmanship
- Trip hazards such as sidewalks or badly installed carpet
- Lack of all-weather driveway surface
Examples of conditions that may be of risk to health and safety of occupants or soundness of property that continues to require automatic repair, but are not limited to:
- Inadequate access/egress from bedrooms to exterior of home
- Leaking or worn out roofs
- Structural problems such as foundation damage caused by settlement
- Defective paint surfaces in homes built before 1978
- Defective exterior paint on homes built after 1978 where finish is unprotected
FHA also no longer mandates automatic inspections for the following items and or conditions in existing properties:
- Wood Destroying insects: only required if there is evidence of active infestation or appraiser states a need for one, mandated by state or local jurisdiction, or at lenders discretion
- Well (individual water system): It is required if mandated by state/local jurisdiction, if suspect of contamination or requires purification system, or when there is evidence of: pipe corrosion, intensive agriculture, coal mining/gas drilling, dump, junk yard, land fill, gas station or dry cleaning operation with in 1/4 mile, or if there is a bad smell, taste, or appearance
- Septic: only required if evidence of failure, mandate, or lenders discretion
- Flat or unobservable roof
Examples of conditions that still require automatic inspection, but not limited to:
- Standing water against foundation, or excessively wet basement
- Hazardous materials on site
- Faulty mechanical systems: electrical, plumbing, or heating
- Structural failure: settlement or bulging foundation walls
Different Than the Conventional Appraisal Process
Although similar in name, the appraisal process for FHA guidelines differs from the standard real estate appraisal. If your home was financed through an FHA loan, it is mandatory to have it appraised on a regular basis to determine its value and to ensure it meets specific safety requirements. This means that for an FHA inspection, your property inspector is essentially providing two services at once.
We would like to further expand on the differences between the two to help clear the distinction:
- Conventional appraisal: Is usually required when a property owner uses a conventional home loan to purchase a home or when they are thinking about placing their house on the market. These appraisals are designed to inspect the condition of your property only in relation to its value. This means that safety concerns are only documented if they will have a direct effect on your home's resale value.
- FHA appraisal: Is a unique process comprised of two services. Firstly, it involves a similar process to a conventional appraisal. We will determine the value of your property as defined by the Department of Housing and Urban Development (HUD). However, in addition to this, a thorough house inspection will be performed to make sure the property is upholding to FHA standards. If the appraiser determines that there are issues with the building, they need to be fixed before you can receive further funding from your loan.
Preparing for Your FHA Inspection
Knowing that the FHA appraisal process differs from the average property inspection, we have compiled a short list to help you get ready for the process. By making sure your home meets the following criteria, we can help guarantee that you meet the FHA guidelines and continue to receive funding from your loan.
- Roofing: Your property's roof must be structurally sound and without any leaks. Your appraiser needs to be confident that the roof will stand strong over the next few years, and the roof itself cannot contain more than three layers.
- Structure: Your home inspector will also check to make sure that the foundation of your building is solid and guaranteed to keep the inhabitants safe. Some of the things that will be looked for include structural damage, leaks, decay, dampness, and termite damage.
- Utilities: This includes your heating, water, and electrical systems. The appraiser will inspect all to make sure that every room has appropriate heating systems, and that your water heater is up to code. We will also check to make sure that your electrical system is completely safe and without any damage or exposed wires.
- Safety hazards: Any potential health concerns will be documented during the inspection process. This includes things such as asbestos, mold, or contaminated soil.
- Location: The area in which your home is located can also cause it to fail an FHA inspection. Some of the issues could include a property that is too noisy or one that is located next to a hazardous site.
- Accessibility: Another factor that plays a role in your appraisal process is how accessible your property is for pedestrians and vehicles. In particular, the appraiser wants to make sure that emergency vehicles would be able to easily access your property.
FHA Loan Requirements in 2020
The up-to-date FHA appraisal guidelines indicate that any property purchased with an FHA loan must be completed by a licensed appraiser that has been approved by the Department of Housing and Urban Development. The guidelines also dictate the minimum requirements of what must be carried out during the property appraisal, but it is also worth noting that your inspector could go above these minimum requirements in order to ensure the safety of the building.
As of 2020, the requirements for an FHA appraisal include:
- A visual inspection of both the interior and exterior of the property.
- Photo documentation of the property to be included in the loan file. This includes all sides of the property as well as any improvements made to the home that could increase its value, such as pools or patios.
- Photo documentation of any comparable sales transaction that is being used to support the appraisal.
- A street map must be provided to show the location of the property, as well as that of any comparable sale that is being used as a reference for the valuation.
- If the requester is attempted to build on the property, photo documentation of the land grade must be provided.
What Are Average FHA Appraisal Fees?
Because the FHA does not dictate the cost of appraisals, it is worthwhile to get an estimate from your inspection company to get an idea of what your rates will be. Because FHA appraisals require strict licensing and certification, you can expect them to be toward the higher end of average inspection costs (depending on the size and type of home).
Fortunately, we here at Rinehart Real Estate Inspection Service are happy to provide honest and precise estimates free of charge, so you can feel confident that you are making an informed decision. It is also recommended that you try to address any noticeable safety concerns before your appraisal, as this may increase your home’s value at the time of inspection.
What to Do After Your FHA Inspection
Many people wrongly believe that FHA appraisals are overly strict and make it almost impossible to get a loan if your property has any infractions, but this is fortunately not the case. Essentially, the FHA standards are put in place to ensure that there are no health and safety hazards on the property that cannot be fixed or would require extensive work to remedy. In fact, what is considered an infraction, or “hit,” has become a bit more lenient in recent years, increasing your chance of being approved after little or no repairs.
After your initial assessment by a licensed appraiser, you will have a set period to complete any documented issues before another final inspection. It is quite common that all the discrepancies found on FHA properties will be easily fixable, and as long as the repairs are made to the standard of the appraiser, the deal can move forward without a hitch. These guidelines are put in place to ensure the continued marketability of the home and protect all its occupants, so there is no need to worry about any unnecessary penalties for things that do not put your property at direct risk.