What you need to know about FHA home loan appraisals includes the difference between an appraisal and an inspection, and what the appraiser looks for when spotting defective conditions and why.
The most important thing to know overall about an FHA home loan appraisal is that the appraisal is not a tool for the borrower to use to determine whether the house is suitable; the appraisal is a tool for the lender to establish the fair market value of the home.
Do not rely on the appraisal to tell you the home is in acceptable condition, it was not designed to do this no matter how it may seem from the appraisal report.
The borrower-arranged home inspection is the best way to “test drive” a home to see if it is free of defects.
Some people misunderstand the appraisal because they are told the FHA appraiser is looking for “defective conditions”. This is true, but the search for those conditions is not as intensive as with a home inspection. That said, the appraisers work can and does affect your ability to buy that particular home.
FHA loan rules have a specific definition of “defective conditions”, found in HUD 4000.1 page 484:
“Defective Conditions refer to defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards or other conditions affecting the health and safety of occupants, collateral security or structural soundness of the dwelling.”
FHA loan rules instruct the appraiser:
“The Appraiser must identify readily observable defective conditions.”
Note the phrase, “readily observable”. That means the appraiser is not required to step onto the roof, or be an expert on electrical or plumbing systems, etc. A home inspection gives a much more in-depth examination of the home beyond what is “readily observable”.
Readily observable problems can include standing water, leaks, excessive dampness or moisture, broken or non-functional appliances, plumbing, or electrical systems, peeling paint, and foundation issues.
HUD 4000.1 adds that if an appraiser can’t determine whether a property meets the FHA’s minimum requirements, an inspection “by a qualified individual or Entity may be required”. That is an expense the borrower should anticipate, just in case.
Some defective conditions can be addressed and corrected. Your appraiser may not such corrections in her appraisal report; such corrections would be required as a condition of loan approval.
In cases where the defective conditions cannot be repaired or corrected, the appraiser may not be able to certify the home is suitable for an FHA mortgage.