FHA appraisal and inspection requirements

When you buy a house, you have several tasks to focus on, from home inspections to mortgage paperwork. If you're planning to get a mortgage backed by the Federal Housing Administration (FHA), the house you want to buy requires an appraisal that meets FHA standards. Here's almost everything you need to know to get started.

What is an FHA home appraisal?

A home appraisal is an estimate of the market value of a property. Since a third party performs the appraisal, the market value is not influenced by the buyer or the seller. An appraisal is a standard requirement for most mortgages and refinances.

Lenders use the market value from the appraisal to determine the loan-to-value ratio of your mortgage. This calculation helps lenders from loaning out more than they are willing to risk and can help limit buyers from borrowing more than the home is worth.

An FHA appraisal also confirms that the property meets the minimum standards set by the U.S. Department of Housing and Urban Development (HUD).

FHA home appraisals require two steps:

• Site visit: FHA appraisers visit homes in person to write notes and take photos. They check for the structures quality, the interior and exterior condition, the state of fixtures and systems and the condition of the lot.
• Market research: Appraisers research selling prices for comparable homes by reviewing homes that closed in the same general area and typically closed during the past six months. They use their findings from the site visit to estimate the market value of the home.

FHA appraisal and inspection checklist

FHA appraisers follow the HUD guidelines for minimum property standards. Homes must meet the following appraisal requirements, or be repaired to meet requirements, to be approved for an FHA loan:

• Must have an undamaged exterior, foundation and roof
• Must have safe and reasonable property access
• Must not contain loose wiring and exposed electrical systems
• Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
• Must have a working, permanent heating system that can heat the property adequately
• Must have surfaces free of chipping or peeling lead-based paint
• Must have adequate access to attic spaces and natural ventilation in crawl spaces
• Must have access to potable water
• Must be free from wood-destroying insect infestations
• Must not have interior and exterior health and safety hazards, such as no handrails on steep staircases
• Must be a marketable property

Do FHA loans require an appraisal?

You have to get an FHA home appraisal if you're planning to refinance or use an FHA loan to buy a house. In most cases, your lender orders the appraisal after you and the seller sign a sales contract or for certain refinances, after you sign the application. Once you receive the appraisal, you and your lender can review it and decide whether you still want to proceed with the loan.

All FHA home appraisals last for 180 days after issue. For the average buyer, 180 days is plenty of time to complete the closing process. If you need more time before signing the loan closing paperwork, the lender will need to verify the property value has not declined.

Who does FHA home appraisals?

Trained professionals complete FHA appraisals and inspections. FHA-approved home appraisers must take several hours of classes and record hundreds of hours of supervised experience. They also have to take an exam and earn a state license before applying to be registered on the FHA Roster of approved appraisers.

Who pays for an appraisal on an FHA loan?

In many cases, the applicant is responsible for the appraisal costs. The price of the appraisal is usually included in the closing costs you pay when you close on your loan. Lenders typically require you to pay the cost of an appraisal at the time of application.

How much does an FHA appraisal cost?

FHA appraisals usually cost a few hundred dollars, about the same price as a conventional home appraisal. These factors may impact the cost of your FHA appraisal:

• Type of property
• Property location
• Number of units in property
• Unique attributes (e.g. dome house)

What happens after an FHA appraisal?

In most cases, your FHA appraisal will confirm that the house is in good condition and the market value is what you expected. If that’s the case, the house will be approved for an FHA loan and you can move forward with closing.

In other cases, your FHA appraisal might bring up some issues that you, the seller and the lender need to address before the property is approved. Some of the most common problems include:

• Repairs: FHA appraisals may note repairs that must be made before the loan can go forward. When this happens, the house is conditionally approved, and the appraiser notes what the market value will be after the repairs. In the meantime, you have to work with the seller to ensure the repairs are made before closing, or in certain cases, funds may need to be put in an escrow account if the repairs have to be completed after closing (e.g. exterior painting during winter months in colder climate  states).
• Low appraisals:  If an FHA appraisal came in lower than the purchase price, you can choose to withdraw from the contract and get your deposit refunded.  Alternately, you can ask the seller to reduce the price so that you can still get the same FHA mortgage. A final option is that you can apply for a smaller FHA loan and pay for the difference with additional assets.
• Deal breakers: If the appraisal notes a health or safety hazard that the seller will not agree to fix, the lender won't approve the property. For example, the FHA usually won’t insure a home that needs major repairs to be livable such as a structural crack in the foundation. In this case, you can't get an FHA loan. 

FHA loans are a great option for first-time homebuyers. If you're looking to learn more about this type of loan or other affordable mortgage options, speak to a home lending advisor about your homebuying goals.