One of my favorite things to do is speak to Realtor offices about appraisals. And inevitably, no matter what topic I’m asked to speak on, our discussion turns to FHA appraisals. “What should I be on the lookout for?” “Do I need to make the repairs before listing the house?” “How is an FHA Appraisal different from a ‘regular’ appraisal?” “Do you have a checklist for me?” Questions surrounding FHA appraisals are many, so we’ll wrap up this last chapter with a discussion of FHA appraisals.
One quick note before we dive in. Generally speaking, if you read FHA, then the other appraisals apply as well (VA and USDA), as they follow most of the same guidelines.
So let’s begin with a brief discussion of the difference between conventional and FHA appraisals.
Conventional and FHA: What’s the Difference?
There are three differences you need to be aware of: loan type, appraisal inspection differences and appraisal reporting differences.
Generally speaking, most conventional loans don’t require PMI (private mortgage insurance) as long as you’re able to put down at least 20%, and these loans are usually processed faster than an FHA loan. Conventional loans aren’t guaranteed or insured by the federal government, while FHA loans are insured by the Federal Housing Administration (FHA). This provides some protection for the lender, in the event that the homeowner defaults on their loan. Lastly, FHA loans usually have lower down payment requirements than conventional loans, as well as lower credit score requirements, and the debt-to-income ratio is a little bit easier to come by for most buyers.
How is an FHA Appraisal Inspection Unique?
During the appraisal inspection, I’ll be measuring the home and taking photographs of the home’s exterior and interior. As with a conventional loan appraisal, I’ll also be photographing anything that affects the home’s market value. Maybe that’s an external influence like a railroad directly behind the property. Or perhaps I observe a deficiency that will need to be addressed such as a bathroom that’s not functioning properly. FHA appraisals go a little deeper. While we’re definitely not completing a full home inspection, I like to compare what we do to a watered down home inspection. A good home inspector will go through the home with a fine-toothed comb, and spend hours looking at every little detail of the home. An appraiser – when completing an FHA appraisal inspection – is concerned with the ‘big picture’. Is the house safe, sound and secure? FHA wants to make sure the major systems are functioning properly, and that the home is suitable for habitation, because after all, they’re insuring the loan, remember?
For a handy resource, head over to riverfrontappraisals.com and hover over the Blog button, and then click on Resources for a list of items appraisers are looking for during an FHA appraisal inspection. While you’re here though, I want to give you a glimpse into a few things an appraiser will do during an FHA appraisal inspection.
In addition to the usual photographs and measurements, the appraiser will also make sure the yard is adequately sloped away from the foundation, especially if there are no gutters on the home. The roof will be examined from the ground, the crawl space will be inspected (usually just a head and shoulders inspection, unless access allows a more thorough inspection), and any environmental hazards will be noted.
Inside the home, all utilities must be on, so that the appraiser can test a representative of lights and plumbing fixtures, and – weather permitting – the furnace and/or air conditioner. We’ll be looking for frayed or uncovered wires, making sure the water heater has a pressure relief valve and piping (and in some areas double strapping). The attic will be observed if accessible, and paint will be checked to make sure it’s not chipping or peeling. Minor cosmetic issues like worn out flooring, a piece of trim missing around a window, or a leaky faucet are acceptable but need to be reported.
And what about reporting differences?
For any appraisal, there must be adequate reporting of the subject property, comparable sales, approaches to value, and reconciliation of value – just to name a few elements. For FHA appraisals, there needs to be a few items in addition to all of these. First, we have to put an FHA Case Number on each page of the appraisal. One interesting tidbit is that the appraiser cannot inspect the home until after the case number has been assigned. Also, FHA is an intended user of the appraisal, in addition to the lender. In conventional appraisals, the lender is usually the only intended user. Finally, if the home does not meet FHA/HUD standards as set forth in the HUD Handbook, then the appraiser should list the various deficiencies, and also include a cost to cure (how much it should cost to correct the deficiencies).
A Quick Word on Final Inspections
Other than new construction, FHA appraisals are the most common type of appraisals that require final inspections. Maybe the home was built prior to 1978 and had peeling/chipping paint, or perhaps the utilities were disconnected, or the water heater was missing a TPR valve discharge pipe. Whatever the deficiency, the repairs will need to be made and a re-inspection will be required. One of the most common requests we receive from loan officers and Realtors is “Hey, my homeowner just finished the repairs. Can we just email or text you the photos so you don’t have to come back out?”. Believe me, if this were acceptable, a lot of appraisers would be very excited. In fact, some appraisers do this already, although as I’ll show – they’re not following the standards set forth for appraisers.
You see, most final inspections are placed on the 1004D form. On that form, it says,
“I certify that I have performed a visual inspection of the subject property to determine if the conditions or requirements stated in the original appraisal have been satisfied” (emphasis mine). So it’s not that I want to come back to the property and make a quick 100 bucks. In fact, most of the time, I lose money on final inspections. What it comes down to is simply, I have signed my name to this report, certifying that I personally have inspected the home and it meets the conditions and requirements of the original appraisal.
The differences between appraisals for FHA and conventional financing really aren’t that many. Just keep in mind these reporting differences, which will result from a slightly more detailed inspection, and you’ll be all set! And remember to check out the resources page on our website where you’ll find a handy cheat sheet for you to know what the appraiser will be looking for during an FHA/VA/USDA inspection. Keep one for yourself, and print off copies or keep a digital copy to forward to your homeowner clients so they’ll be well-prepared for the appraiser. Just remember that this list isn’t exhaustive, but does cover the most common issues.
Committed to helping you understand your home’s market value,
Ryan Bays, SRA, AI-RRS