The FHA appraisal process is a requirement. You can’t purchase a home with an FHA mortgage unless there has been an appraisal on the property to determine the fair market value of the home and to ensure the property meets FHA minimum standards. Today’s appraisal standards for FHA home loans do NOT include stepping out onto the roof or physically entering difficult-to-access spaces, which is why you should never purchase a home without arranging a home inspection.
The appraisal requirements for your home purchase can be found in HUD 4000.1. These requirements apply to proposed construction, new construction, and existing construction properties.
According to HUD 4000.1, “The Mortgagee must evaluate the appraisal and any supporting documentation to determine if the Property complies with HUDs Property Acceptability Criteria. Existing and New Construction Properties must comply with Application of Minimum Property Requirements and Minimum Property Standards by Construction Status”.
During the FHA appraisal, the property is reviewed but NOT “inspected”. In some cases “defective conditions” may be noted.
In such cases, HUD 4000l.1 states, “The Mortgagee must evaluate the appraisal in accordance with Defective Conditions to determine if the property is eligible for an FHA-insured Mortgage. If defective conditions exist and correction is not feasible, the Mortgagee must reject the Property”.
Defective conditions can be fixed, and if the FHA fee appraiser directs such corrections they are required as a condition of loan approval.
Some borrowers want to purchase a fixer-upper home with an FHA rehab loan (also known as an FHA 203(k) or 203(h) depending on which type is applied for) and the property would obviously NOT meet minimum standards at the time of purchase. FHA loan rules address this situation, stating:
“If the Mortgage is to be insured under the 203(k) program, the Mortgagee must confirm that the Property will comply with the following eligibility criteria upon completion of repairs and improvements.”
Borrowers should budget and save for both an initial appraisal fee and a follow-up inspection if needed. The follow-up, also known as a compliance inspection, may be required for certain corrections required as a condition of loan approval.
In all of this, it should be noted that as mentioned above, the FHA appraisal is NOT a home inspection, is not as complete as a home inspection, nor should the FHA appraisal process be considered a stamp of approval that the property is free from issues.
Only the optional (but extremely important) home inspection will give the borrower the most informed look at the state of the home. The FHA appraisal will NOT do this.
At the time of this writing, FHA appraisal rules have been temporarily modified to allow exterior-only appraisals due to concerns over COVID-19.
Borrowers should consider this if they are not convinced to get a home inspection along with an FHA appraisal–the appraiser cannot guarantee your home is defect-free before purchase. Only the home inspection will give you a more fully informed idea of whether to purchase or not.