What Do Buyers Need to Know About FHA Financing and FHA Appraisals?
The majority of home buyers use financing to purchase a new home. FHA loans are a popular option since the downpayment is low and the qualification criteria can be more forgiving than some conventional loans.
It's important to know that when using a FHA loan to buy a house, your lender will use a HUD-approved home appraiser to determine the value and inspect the property. You are probably thinking "doesn't a home inspector inspect the house, not the appraiser?" Yes, typically the appraiser is mostly concerned with determining the current market value of a home, but with a FHA loan the HUD-approved appraiser must also inspect the home to ensure it meets HUD's minimum property standards.
The FHA appraisal guidelines include instructions for appraisers to inspect the property. According to the guidelines the HUD-approved appraiser must visually inspect the property inside and out. While doing so the appraiser must take photos of the property showing the front, rear and sides of the home, as well as any value-adding improvements such as a pool. In addition, the appraiser must take a photo of the comparable sales used in the appraisal report. Last, the appraiser must provide a street map showing the location of the subject property and the comparable properties used in the report.
While inspecting the property the HUD-approved appraiser must assess the condition of the property for the health and safety of the people who will be living in the home. The home must be habitable and comfortable with no potential hazards for the new homeowners. Here are some common items that HUD-approved appraisers look for:
- main goal is to find any safety issues with the property
- peeling paint (especially for homes built prior to 1978 due to lead based paint that was commonly used)
- loose handrails or lack of handrails at steps and stairways
- lot must be graded to prevent moisture from entering the foundation or basement
- all bedrooms must have an exit to the exterior, a window is sufficient
- the heating system must provide a comfortable environment
- the roof must be in good condition
- the foundation must be in good repair
Any items found by the HUD-approved appraisal must be fixed. The official FHA appraisal guidelines state that "Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants." The appraiser will come out for a re-inspection to ensure the items are repaired. If all items are satisfactory during the final inspection then the buyer can move forward with the loan.
Do you still need to get a home inspection if you are getting an FHA loan? Absolutely. While the home inspector may make note of items that the appraiser will find, the opposite is not true. The HUD-approved appraiser is focused on health and safety only. The appraiser does not complete a full home inspection like a licensed home inspector does. It's important to have a qualified home inspector inspect the property as well.
If you are using FHA financing it is important to look at the condition of a home prior to making an offer. Determine if there are any safety red flags that may complicate the transaction. Also speak with your Realtor and decide if you could address those items in your offer to make sure they will be repaired for your financing requirements. Sometimes it is a good idea to get a professional home inspection completed prior to the FHA appraisal to determine if there are any issues that the FHA appraiser might find. It's usually easier to negotiate repairs with the seller either up front during the offer negotiations or during the home inspection period. And with the TRID rules some buyers may not be able to complete the appraisal during the first ten days anyway (length of standard home inspection period in Arizona).
