The FHA appraisal process is a typical part of purchasing a home. The appraisal establishes the fair market value of the property and also insures the home meets minimum FHA loan standards. These standards are know as MPS and MPRs-Minimum Property Standards and Minimum Property Requirements, respectively.
While the FHA appraisal is not designed to catch any/all problems with a home, it is a tool for the lender to use to determine whether the property is acceptable or not. Whether you’re applying for a fixed rate mortgage or adjustable rate loan, purchasing a condo, town home, or manufactured home, each transaction is subject to the FHA appraisal process.
What happens if the appraiser reviews the property only to find issues that do not meet FHA minimum standards? The answer is in HUD 4000.1, the FHA loan rule book for single-family mortgage loan transactions.
“When examination of New or Existing Construction reveals non-compliance with MPR and MPS, the Appraiser must report the repairs necessary to make the Property comply, provide an estimated cost to cure, provide descriptive photographs, and condition the appraisal for the required repairs.”
If compliance is only possible by starting major repairs or alterations, “the Appraiser must report all readily observable property deficiencies, as well as any adverse conditions discovered performing the research involved in completion of the appraisal, within the reporting form” according to HUD 4000.1. Some repairs are not considered “major” but rather, “limited”. In such cases, the FHA appraiser is required to, “limit required repairs to those repairs necessary to:
-maintain the safety, security and soundness of the Property;
-preserve the continued marketability of the Property; and
-protect the health and safety of the occupants.”
Is there ever a situation where the home may be appraised (for new purchase FHA loans) “as-is”? HUD 4000.1 addresses this issue, stating:
“The Appraiser may complete an as-is appraisal for existing Properties when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the health and safety of the occupants or the security and soundness of the Property. Cosmetic or minor repairs are not required, but the Appraiser must report and consider them in the overall condition when rating and valuing the Property.”
In such cases, “Cosmetic repairs include missing handrails that do not pose a threat to safety, holes in window screens, cracked window glass, defective interior paint surfaces in housing constructed after 1978, minor plumbing leaks that do not cause damage (such as a dripping faucet), and other inoperable or damaged components that in the Appraisers professional judgment do not pose a health and safety issue to the occupants of the house.”
These rules are enforced in a different manner when it comes to FHA rehab loans-obviously a property in need of a rehab loan won’t be in compliance when it is first purchased, but must meet FHA minimum standards once the repair work is completed. Talk to a lender about how FHA rehab loan requirements may differ in this area to see how your transaction may be affected.