The FHA appraisal is a requirement of the home loan process; it is designed to help establish current market value of a property based on the latest property values, the overall condition of the home and property, etc.
An appraisal is NOT the same as the separate, borrower-funded home inspection. Appraisals are nowhere near as in-depth as inspections and the results of the appraisal should not be mistaken for a home inspection.
Appraisals are required for all forward mortgages. Recent changes to appraisal rules in 2020 in response to social distancing required by the COVID-19 novel coronavirus pandemic make the process operate differently than before temporarily.
In March of 2020, the FHA and HUD issued a Mortgagee Letter announcing situational changes to the appraisal requirements that included the ability to have an exterior-only appraisal or a desktop appraisal during shelter-in-place and other lockdown measures.
This means there is a real possibility you can have a home appraised without an FHA appraiser looking inside the property. We’ll get to the implications of that later, but some first-time borrowers want to know the basics of this process.
Ask a lender or realtor about the real estate appraisal process and you’ll learn appraisals are a tool for the lender (NOT the borrower) that helps establish the fair market value of the home, as stated above.
Why is an appraisal necessary? It helps the lender determine the maximum loan amount for your transaction. It also theoretically ensures the home meets minimum code requirements–something that can protect a borrower later on when it’s time to sell the home.
Home inspections are not a requirement per se, but skipping one is a very bad idea. These inspections, which are paid for and arranged by the borrower, are a more complete review of the condition of the home to help the buyer make an informed decision about buying the property.
HUD 4000.1 has instructions for how the FHA appraisal is to be done. “As the on-site representative for the Mortgagee, the Appraiser provides preliminary verification that a Property meets the Property Acceptability Criteria, which includes HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS)”
But the new, temporary rules added for coronavirus pandemic concerns mean your appraisal is likely to be exterior-only. This may depend greatly on whether your city or state is “open for business” or not. Exterior-only appraisals may not detect issues related to mold, water in the basement or crawlspace, etc.
Plan on getting a home inspection.
Another thing to keep in mind? Under the current appraisal rules, your home may be appraised “as-is” unless Minimum Property Requirements-related deficiencies “are observed from the street or otherwise known”.
The changes the FHA and HUD have made are not permanent, nor added to the FHA Single Family Loan Handbook, HUD 4000.1 at the time of this writing. There is no current expiration date, but one may be added later depending on how reopening the country for business goes.