When you want an FHA loan to buy your home, you need an FHA-approved appraiser to inspect the home before the loan can be completed. A home appraisal is simply an estimate of the current market value of the home. When a property is refinanced or bought, an appraisal is required.
FHA lenders use the home appraisal to determine the loan to value of the mortgage loan. This also is done to ensure you are not paying above market value for the house. This process protects the buyer and the lender. After all, if you default on the loan, the lender does not want to be in a position where they loaned more than the home can be sold for on the current market.
When you start the FHA loan process, you will need to pay for the appraisal well before closing. The typical FHA appraisal today costs $400 or $500, according to the Uniform Residential Appraisal Report or URAR. If you are getting an FHA streamline refinance, you do not need an appraisal.
The major factors that affect what the appraisal costs are:
- How many square feet the home is
- The type of property
- How much land
- Homes that have a lot of repairs or damage
- The company doing the appraisal
When you buy with an FHA loan, the appraiser must determine if the home meets FHA standards. He will typically look at the following:
- The interior and exterior of the home
- See if there is lead based paint
- Check for major leaks, cracks and damage to the exterior
- Ceilings and walls are in decent condition
- Note upgrades that could boost value
- Ensure landscape is in decent condition
- Check cooling and heating systems
- Take photos of the entire home, interior and exterior
HUD requires the appraiser to look for any health and safety problems as well as quality of construction to ensure that the home meets minimum requirements. The 2018 checklist for the FHA appraiser includes:
- Property must be complete and marketable
- Proper heating system
- No lead-based paints
- No electrical wiring exposed
- Exterior walls must be undamaged
- No home hazards
- Good drainage
- Roof does not need repair
- Water is safe to drink
- Crawl spaces must be naturally ventilated
- Gas, sewage, water and electric must be working
There also have been revisions made in the FHA 4000.1 handbook that ensure home appraisals are done more accurately. In the early 2000s, there were many improper FHA appraisals done that increased home values and FHA lenders were more able to close loans.
Because of this, HUD has cracked down a lot and has made a lot of changes to the appraisal process and minimum property standards. These changes went into effect in 2015. These revisions must be met for the home and borrower to qualify for financing through FHA. FHA appraisers must now ensure all appliances are working; check that the water heater is working; roof that will need repair within two years must be reported; analyze and report how marketable a home is in an airport zone; and income appraisal approach need to be considered.
The FHA appraiser determines what the home is worth by checking comparable sales in your area in the previous six months. Then, they compare the square footage, bedrooms and bathrooms, and the general condition of the property. This information is included in the appraisal and is sent to the lender that is doing the FHA home loan.
For people who want to improve the value of the home for an FHA appraisal, the following is recommended:
- Repair any home damage and clean up and touch up walls
- Landscaping should be well cared for and trees and bushes trimmed
- Exterior paint should be in decent condition and have no cracks
- Clean the home from top to bottom; get all clutter put away
- Touch up the paint on doors and moldings
- Open blinds and windows to let in more light
- Steam clean carpets and polish tile or wood floors
- Repair any fixtures that are damaged
FHA appraisals tend to be more stringent than conventional loan appraisals. The reason is that the purpose of the appraisal is not just to assess the current market value of the home. When you are getting an FHA loan, HUD requires the market value to be determined, but they also must ensure that the property meets minimum HUD standards that are outlined in this article. The good news is that if there are any issues found in the FHA appraisal that affect the value of the home, they are often correctable. Either the buyer or the seller will need to correct anything that is flagged before the loan is funded, however.