You will typically need to obtain an appraisal on the property if you’re applying for a home loan through the Federal Housing Administration (FHA). The purpose of this appraisal is to confirm that the property is worth what it is being listed for and to determine whether any repairs are necessary before a mortgage can be approved or whether the house is ready to live in.
We’ll go over the specifics of the FHA appraisal procedure, including how it functions and what it means for you, the home buyer. When you’re finished, you’ll be equipped with all the information you require and ready to move forward.
- The physical structure of the building. No damage to the home’s exterior, foundation and roof. No sign of insect infestation. …
- The livability of the building. Working utilities, including electricity, heat and clean water. …
- The property site. No soil contaminants or underground storage tanks.
What Is An FHA Mortgage?
A mortgage loan that is insured by the Federal Housing Administration is known as an FHA mortgage. The FHA can increase homeownership opportunities for borrowers who don’t meet the financial requirements for a conventional mortgage by guarantying these loans.
Particularly, individuals or couples with a FICO credit rating of at least 500 are eligible for FHA-backed mortgages. Additionally, borrowers must be able to come up with a minimum 3 percent down payment. 5%. A conventional bank provides the mortgage, but the FHA promises to pay the bank back if the borrower defaults on the loan. As a result, banks are willing to give mortgages to individuals who otherwise would not be eligible. This isn’t just good for the new homeowners. Increased homeownership is beneficial to the economy as a whole.
One thing to keep in mind is that borrowers who put down less than 10% must meet special requirements for FHA loans. For those individuals, you’ll be required to purchase mortgage insurance. This is only logical because you pose a greater risk to the lender with a very small down payment. The good news is that you only have to continue paying mortgage insurance until you have 10% equity in the house. At that point, you’re free to drop the insurance.
In actuality, this is more lenient than the guidelines for conventional mortgages. In most cases, private lenders will demand mortgage insurance from anyone who makes a less-than-20% down payment.
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What Is An FHA Appraisal?
The FHA wants to make sure they’re only guaranteeing homes worth the investment in order to make sure they’re giving taxpayers a good return on their money. This is not all that dissimilar from the standards used by conventional lenders for their loans.
To understand why, imagine this scenario. A homebuyer purchases a home for $200,000 without an appraisal. They lose their job after six months and are unable to continue making payments. The bank eventually seizes the property again and attempts to sell it to make up for its losses. The house will only sell for $150,000 because the original buyer significantly overpaid for it. All of a sudden, the bank is taking a loss.
In a similar vein, an appraisal serves to confirm that the property is fit for human habitation. If the house is unsuitable, the owner might have to leave and go into default on the mortgage. This is even worse for the bank because they are now reclaiming a house that needs to be repaired in order to be sold.
The only requirement for an FHA appraisal is that it be completed by an appraiser who has been approved by the agency. The appraiser will assess the property’s attributes, including its square footage, condition, and neighborhood. They’ll give you and the FHA their estimate of the home’s fair market value once the appraisal is complete. By the way, this is beneficial for more than just the bank and the FHA. Additionally, it aids in making sure that you are not paying too much for your new house.
FHA Appraisal Vs. Home Inspection
It can be simple to conflate an appraisal and a home inspection if you are unfamiliar with the ins and outs of the home buying process. Although the two terms have a similar sound, they refer to very different processes. Both FHA and conventional appraisals aim to ascertain the home’s fair market value and locate any significant safety issues. However, the main objective is to assist lenders in ensuring that they are not taking on excessive risk. They’ll consider the estimated value of the house and the requested loan amount. They will determine the borrower’s recurring payments and the loan-to-value ratio. The lender can easily assess how risky the loan is given all of that information and the borrower’s credit rating.
A home inspection is entirely different. While an appraiser will check for many of the same safety issues as an inspector, they’ll dig much deeper. They’ll try to identify any defects whatsoever. For instance, they’ll mention that the roof may need to be reshingled in the upcoming years. Their role does not include estimating the property’s value or providing the lender with reports. Their responsibility is to ensure that potential homebuyers are fully informed about the state of the property.
What Types Of Homes Can Be Approved?
FHA loans are typically only accessible to those buying owner-occupied homes. Due to the FHA’s refusal to guarantee a mortgage on a home that has recently sold within the past 90 days, they cannot be used to finance the majority of investment properties.
Acceptable property types include:
Assigning Value On A Home
The main duty of an FHA appraiser is to determine the home’s fair market value. This involves a number of different factors, and each one must be taken into account.
A home’s amenities, square footage, and lot size will all be considered by the appraiser. After that, they will select a group of nearby, comparable homes that have recently sold. The appraiser will account for any differences. For instance, they might increase the value of a home with an additional bathroom while deducting value from a home with a smaller garage. They average the value of the comparable sales after making their adjustments to determine the appraised property’s fair market value.
The secondary duty of the FHA appraiser is to assess the property’s safety. This serves two purposes. First, it warns the bank and the potential homeowner about any issues that could make the house uninhabitable. Second, it warns them of potential problems in case the homeowner needs to sell or the bank needs to seize the property.
The appraiser who has been approved by the FHA will search for the following dangers during a typical safety evaluation:
During the appraisal, an FHA appraiser will consider a number of aspects of the property. Some aspects of the home’s condition and safety are more important than others in terms of its value. Let’s discuss some of the factors they will take into account:
There must be no damage to the siding, foundation, or roof. The house must be free of insect or rodent infestations. There must be no loose or exposed wiring.
The utilities must be connected and in good working order, as must the heat. There must be a connection to a sewer line or a sanitary well. There must be no exposed lead paint. The house must meet all fire codes and other applicable local safety codes.
There must be no contaminants in the soil. There must be sufficient drainage to keep water away from the foundation. The property itself must be safe to access.
After the appraisal, they will need to select some comparable sales and cite additional information. At minimum, they need to include:
What Happens After An FHA Appraisal?
The outcome of the appraisal will determine everything that happens after that. The lender will approve the loan and the FHA will agree to back it if there are no safety risks and the loan amount is reasonable for the appraised value. But let’s look at what happens if there are problems.
If An Appraisal Comes Back Low
When the appraised value is lower than the suggested selling price, the appraisal is considered to be low. In that case, the bank normally won’t approve the loan. There are some things you can do about this, though:
If The Appraiser Requests Repairs
The lender may conditionally approve the loan if the house needs to be repaired in order to comply with health and safety regulations. They will give the seller a list of necessary repairs, and if the seller makes those repairs, the loan will be approved. The loan will not be approved if the seller chooses not to make the repairs.
However, it’s usually best for the seller to make any repairs because it’s likely that any potential buyers in the future will want those problems fixed before they buy!
How To Find FHA-Approved Homes
The US Department of Housing and Urban Development (HUD) offers FHA loans. You can easily locate a list of houses in your area that have already received FHA approval by visiting the HUD website. Of course, you can use an FHA loan to buy almost any property, but the website makes it simpler to locate them.
As you can see, an ordinary appraisal and an FHA appraisal are very similar. The primary distinction is that an FHA-approved inspector, not one authorized by a private bank, is appraising your new home. You’ll be well on your way to owning your new home if you’re ready for the outcomes.
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What fails an FHA inspection?
To keep its occupants safe, the building’s general construction must be in good condition. This means that the property may fail an inspection due to serious structural damage, leaks, dampness, decay, or termite damage. In this situation, repairs are necessary before the FHA loan can be approved.
What would disqualify a home from FHA?
Bad credit, a high debt-to-income ratio, and a lack of funds to cover the down payment and closing costs are the three most common reasons FHA loans are denied.
What will flag an FHA inspection?
Checklist of FHA appraisal requirements Must have a roof, foundation, and exterior that are all in good condition Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. All necessary utilities, including gas, electricity, water, and sewage, must be in good working order.
Are FHA inspections more strict than conventional?
FHA mortgage appraisals are more rigorous than standard home appraisals. You should be aware of what these appraisals entail whether you’re considering refinancing an FHA loan, purchasing a home with an FHA loan, or even selling to someone who will use an FHA loan.