The FHA appraisal process can be mysterious to some. It’s not as complete as a home inspection, the results of the appraisal should not be mistaken for a home inspection, nor should the FHA appraisal be considered as a stamp of approval on a home. So what IS an appraisal? And what do FHA appraisal rules require from this process?
There’s an old notion borrowers should know about when it comes to inspections versus appraisals. The appraisal is basically a tool for the lender, the inspection is for the borrower. As long as you keep that in mind when ordering your home inspection, you’ll be able to keep these two separate processes in the right perspective.
HUD 4000.1 has rules and instructions for how an FHA appraisal is to be carried out. It states, “As the on-site representative for the Mortgagee, the Appraiser provides preliminary verification that a Property meets the Property Acceptability Criteria, which includes HUDs Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).”
Also, “The Mortgagee must underwrite the completed appraisal report to determine if the Property provides sufficient collateral for the FHA-insured Mortgage.”
How is this done for an FHA loan? The property is reviewed, and its condition is compared to similar properties in the same housing market. The property must be visually reviewed. HUD 4000.1: “The Mortgagee must evaluate the appraisal in accordance with Defective Conditions to determine if the Property is eligible for an FHA-insured Mortgage. If defective conditions exist and correction is not feasible, the Mortgagee must reject the Property.”
HUD 4000.1 explains what is to happen if defective conditions are detected. “When examination of a Property reveals noncompliance with the Property Acceptability Criteria, the Appraiser must note all repairs necessary to make the Property comply with HUDs Property Acceptability Criteria, together with the estimated cost to cure. If the Appraiser cannot determine that a Property meets HUDs MPR or MPS, the Mortgagee may obtain an inspection from a qualified Entity to make the determination.”
Finding-or NOT finding-defective conditions does not automatically translate into “finding ALL defective conditions”. It’s possible that an appraiser might not spot some issues during the FHA appraisal. The appraiser is not, for example, required to step onto the roof. Nor is the appraiser required to be an expert on plumbing systems, foundation issues, etc. Borrowers always need to keep in mind that the appraisal is not intended for them, and the appraisal is not intended to detect any/all issues.
Getting an optional home inspection is the borrower’s responsibility and until you have the results of a home inspection, you cannot make a truly informed purchase of the home you want to buy with your FHA mortgage. FHA appraisal fees and home inspection fees are different and will vary depending on the housing market you’re in, but paying these fees (even the optional inspection fee) is a typical part of doing business on a home mortgage loan.