What do borrowers need to know about FHA loan appraisal rules? We field reader questions every month that include queries about the appraisal process and whether or not a certain type of condition is permitted in a home to be purchased with an FHA mortgage.
Some recent reader questions go along these lines:
“Is an unfinished basement acceptable in a home I’m buying with an FHA mortgage?”
“Does the garage have to be wired for electricity in order to be approved for an FHA loan?
and, “The home I want to buy is served by a well instead of being connected to a local utility. Is this permitted?”
There are some FHA loan rules for appraisals that may address some or all of these issues, but there’s a very important detail to remember about appraisal requirements.
Appraisal issues are often about valuation of the property, the safety and usability of it. If a condition affects the value or “remaining economic life” of the home, it may require corrections or repairs.
The acceptability of various conditions or features of a property will depend greatly on rules and ordinances affecting a specific housing market.
FHA loan rules don’t include regulations or instructions for each and every possible issue that could be associated with an FHA appraisal. Borrowers can’t rely on the FHA loan rules alone to help them understand what may be required in a certain situation.
State and local building code requirements are more often than not the source for the answers to many of the questions we listed above. FHA loan rules never cancel out local code requirements, and HUD 4000.1, the FHA loan handbook, tells us that local rules will definitely apply in these areas.
So it’s entirely possible that what is acceptable in one part of the country in a home to be purchased with an FHA loan may not be permitted elsewhere. Building code is also subject to change, what was acceptable in years past may no longer apply.
Borrowers with questions about how state or local ordinances might affect their transaction will need to consult the local authority to learn the requirements, the FHA does not archive these regulations.
As always, when talking about FHA appraisals, we like to remind people that the appraisal is a tool for the lender, and should never be considered a stamp of approval or guarantee that a home is defect-free. That is the job of the home inspection, which is optional but extremely important.