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2019 FHA Appraisal Guide

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Are you considering a mortgage guaranteed by the Federal Housing Administration (FHA) for your next home? Known for their broad accessibility, FHA-insured mortgages include 3.5% down payment mortgages, fixer-upper loans (called FHA 203k mortgages) and reverse mortgages known as home equity conversion mortgages (HECM).

Although FHA loans are widely available, the appraisal process can make it difficult for homebuyers and sellers to close a deal. During FHA mortgage underwriting, lenders use an appraisal report to ensure a house meets FHA property standards. When a house doesn’t meet these standards, the lender can’t make the loan. Here’s what you need to know to navigate the FHA appraisal process in 2019.

What is an FHA appraisal?

A lender always orders an appraisal to establish an objective value for the house in question. This keeps lenders from issuing a mortgage when the house backing the loan isn’t worth the amount being lent. As a borrower, you’ll pay for the appraisal before closing on your loan. The cost of an appraisal isn’t set by the FHA, but the Federal Reserve estimates an appraisal costs between $300 to $700.

While lenders require appraisals for all types of mortgages, the FHA appraisal process is a little different. In addition to establishing a value for the home, trained and licensed appraisers also inspect the property during the FHA appraisal. The inspection gives lenders information about whether a property meets the FHA’s minimum property standards. The requirements help ensure a property is structurally sound and livable. The standards protect the FHA from insuring a property that deteriorates due to structural issues.

To be sure that a property meets FHA standards, the appraisal process has different requirements than the conventional appraisal process. For example, during an FHA appraisal, utilities must be on. This allows the appraiser to ensure the water, sewage, electrical and heating systems work properly. The appraiser also has to test that the appliances work. The appraiser will carefully detail and photograph any part of the property that doesn’t meet the FHA’s standards.

What happens if a property doesn’t meet FHA standards?

If a house doesn’t meet the minimum requirements, the appraiser adds an estimate of the cost of required repairs to the appraisal. The FHA won’t guarantee a mortgage unless the property meets its minimum requirements. So banks won’t lend money until the required repairs are completed. Repair requirements could cause a sale to fall apart unless the buyers and seller can agree on who will pay for the required repairs.

FHA appraisal changes for 2019

The last major overhaul to FHA appraisal standards was in March 2016. However, in September of 2018, the FHA added new rules for home equity conversion mortgages. Under the new rules, the FHA performs a collateral risk assessment for all reverse mortgages. If the FHA determines the property has risk, it will require a second appraisal. The lender can then only underwrite the reverse mortgage on the basis of the lower appraisal.

Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA), told LendingTree, “We haven’t been advised what might trigger a second appraisal, and we’re still in the early days of the collateral risk assessments. That being said, we’re seeing somewhere in the neighborhood of about 25% of appraisal cases submitted require a second appraisal.”

Irwin explained that HUD could require a second appraisal for any reverse mortgage. However, the NRMLA has noticed that unusual property types, such as multifamily properties, condos and manufactured homes are more likely to be subjected to a second appraisal.

FHA home appraisal guidelines

An FHA appraisal has three components: a site analysis, a property analysis and a property valuation.

In the site analysis, the appraiser works to figure out the desirability of the property’s location. The appraiser will consider market forces and trends and external factors (such as new construction plans) that will likely affect the future value of the property.

The property analysis gives the appraiser the opportunity to estimate the value of the house and yard. However, the FHA requires the property meet its general acceptability requirements. Here are a few things the appraiser will consider:

  • The house has to be accessible from the front yard and without going through another living area.
  • The foundation has to be in good condition.
  • A home’s lot has to lead moisture away from the house.
  • Utilities such as water, sewage, heat and electricity have to work.
  • Each house has to include a kitchen, bathroom and other living spaces.
  • People need to be able to escape from a bedroom in the event of a fire.
  • Swimming pools have to be up to code.
  • The roof must not require major repairs for at least two years.
  • There should be no chipped lead-based paint.
  • The property has to be free from hazards, noxious odors and excessive noise.

If the property fails to meet any FHA standards, the appraiser will include photos of the area that isn’t to code. They will also include estimates of the required costs of repairs.

Once the site and property analyses are complete, the appraiser estimates the value of the house. The most common form of evaluation is the “sales comparison approach.” In this approach, the appraiser compares the value of the home under consideration to similar homes in the area that have sold over the past six months. Appraisers cannot use comparable sales that are more than a year old when assessing the value of a home.

In rare cases, appraisers might use alternative methods to estimate the value of a home. For example, in the case of new construction, an appraiser may assess the value of property based on the cost of building it. Additionally, income-producing properties (such as multifamily homes) may be assessed based on their revenue potential.

Special considerations for new construction appraisals

If you’re looking to buy a newly constructed home, you can take out an FHA mortgage. The appraiser will estimate the fair value of the home based on its projected value once construction is complete. As the house won’t be complete at the time of the appraisal, the FHA appraisal process looks a little bit different for new construction.

The biggest difference is the information the appraiser must consider. If the house is less than 90% complete, the appraiser has to consider the floor plan and other documents to assess the value of the property when it is completed. The lender will still use the appraiser’s report to determine whether the property will meet the FHA’s standards for new builds when it is complete.

If the property is more than 90% complete (with just preference items such as countertop installation remaining), the appraisal report will include things that need to be completed after the appraisal.

Special considerations for appraisals for fixer-uppers (FHA 203k mortgages)

Borrowers can use an FHA 203k mortgage to buy and rehab a fixer-upper home. Houses purchased with an FHA 203k mortgage can be in a distressed condition when you buy them, but they have to comply with the FHA’s property standards once they’re fixed up.

To be sure the property will meet this expectation, your lender will order an “as-repaired” appraisal before it will underwrite the loan. This appraisal gives the bank the information it needs to be sure the house will qualify for FHA insurance once the renovations are done. The appraisal will also include an estimate of the fair market value of the home once all repairs are complete.

In addition to an appraisal, the lender requires a work write-up and cost estimate for repairs on the house. If the purchase price of the house plus the cost estimate for required work comes in over the “as-repaired” estimated value of the house, the lender will not be able to issue a loan.

What if the appraisal comes in low?

A low appraisal value for a home you want to buy can prevent a sale from going through. The FHA’s appraisal establishes the value of a property. If the appraisal doesn’t match the expected sales price for the home, the lender may not be able to underwrite the loan.

A loan underwriter can ask an appraiser to reconsider the value of the home if it looks like the appraiser didn’t consider all the relevant information on the home. They may also order a second appraisal if the first appraisal had deficiencies. For example, if an appraiser didn’t understand local market dynamics, you may have a valid reason to order a second appraisal.

However, outside of these scenarios, the FHA prohibits lenders from ordering a second appraisal. This doesn’t mean the sale must fall apart, however. For example, a low appraised value could give you some room to negotiate a lower price. If that option doesn’t work, you could put more cash down to meet the FHA’s required loan-to-value ratios.

Work with your lender to consider all your options before you cancel your sales contract based on a low appraisal value.

The bottom line

FHA appraisals are more involved than conventional mortgage appraisals, and they may cause a sale to fall apart more easily. However, buyers and sellers who are willing to complete required repairs can see their deal through, and there are other options available. Go to LendingTree’s FHA hub for more general information on FHA loans and their requirements.


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