How do FHA loan appraisals work? This question is a vital one because some get the appraisal process confused with a home inspection and the two are not the same. The importance of an FHA appraisal in your loan process has to do with the lender getting information that helps calculate the fair market value of the home, while the home inspection gives the borrower information needed to make an informed purchase.
FHA appraisals are governed by the rules in the FHA loan handbook, HUD 4000.1, which says the lender is required to, “order an appraisal from an Appraiser who is listed on the FHA Appraiser Roster and is qualified and knowledgeable in the specific market area in which the Property is located. The Mortgagee must evaluate the Appraiser’s education, training and actual field experience to determine whether the Appraiser has sufficient qualifications to perform the appraisal before assignment.”
FHA Appraisal Rules
The FHA loan rules that govern appraisals can be found in a variety of places in HUD 4000.1, but page 125 has some of the most important guidelines, at least where consumer protection is concerned.
“The Mortgagee must ensure it does not compromise the Appraiser’s independence. The Mortgagee may not allow the Appraiser to be selected, retained, managed, or compensated by a mortgage broker or any member of a Mortgagee’s staff who is compensated on a commission basis tied to the successful completion of a Mortgage or who is not independent of the Mortgagee’s mortgage production staff or processes.”
Furthermore, “The effective date of the appraisal cannot be before the FHA case number assignment date unless the Mortgagee certifies, via the certification field in the Appraisal Logging Screen in FHAC, that the appraisal was ordered for conventional lending or government-guaranteed loan purposes and was performed by a FHA Roster Appraiser.”
These rules establish a set of procedures which must be followed, and build in some predictability into the appraisal process.
What The FHA Appraisal Does
Appraisals are intended to establish the fair market value of the home, and also to insure that the property meets FHA minimum standards. Note that we’re talking about minimums here, and not whether or not the property is completely free of defects. Establishing THAT is not the job of the FHA appraiser, nor is the appraisal process a stamp of approval for homes that “pass” the process. The FHA appraisal was never intended as an indicator that the home has no problems.
To establish the actual condition of the house beyond minimum requirements and/or spot defects that may not be apparent to an appraiser, the borrower should choose to pay for an optional home inspection which gives a detailed look at the home and its’ condition.
The appraisal process begins when a borrower has selected a home to be purchased and is a step towards owning that property. The FHA loan will only be approved once the appraisal is complete and the lender has determined that the house is suitable for an FHA mortgage. In a future blog post, we’ll examine more details of the appraisal process and how it works.