Will The Home Pass The FHA Appraisal? What To Look For
You’ve been pre-approved by an FHA lender and a seller has accepted your offer on the perfect home. Now that you have a property under contract, the next step is to get an FHA appraisal to assess its value and ensure it meets minimum Federal Housing Administration standards.
This guide covers everything you need to know when preparing for your appraisal, including the FHA home inspection requirements, issues that could cause the appraisal to fail, and your options depending on the results.
Key Takeaways
Purchasing a home with an FHA mortgage requires obtaining an FHA appraisal.
FHA appraisals ensure properties are worth their contract price and meet minimum program standards.
Some reasons homes can fail FHA appraisal include structural issues, electrical or plumbing problems, or safety hazards.
Sellers may remedy problems before closing so your FHA lender can approve the loan.
If the seller can’t or won’t repair issues, you may still be able to close using an FHA repair escrow or 203(k) loan.
What Is an FHA Home Appraisal?
The FHA home appraisal serves two purposes:
To assess the home’s value to ensure the buyer isn’t overpaying and the lender isn’t overlending
To verify that the home meets the FHA's minimum property requirements for safety, soundness, and security
An FHA-approved appraiser must complete your appraisal. Although your FHA lender hires the appraiser, typically through an appraisal management company, they do not individually select the professional who appraises the home. Appraisers work independently from buyers, sellers, and mortgage providers to offer unbiased valuations and reports.
What to Expect During an FHA Home Appraisal
The site visit is a core part of the FHA home appraisal process. This involves:
Measuring the exterior of the home
Assessing the site’s size, topography, and proximity to other homes
Inspecting the home’s interior room by room, noting materials, construction quality, and condition
Checking electrical, HVAC, and plumbing systems for basic functionality and signs of apparent damage
Inspecting for signs of termite damage or infestations
Checking the attic for signs of leaking or water damage
Your appraiser takes pictures throughout the process to show your lender that the home meets FHA inspection requirements and to document any problems they encounter.
After completing the site visit, the appraiser researches how homes like the one you're purchasing are faring in the local market. This involves poring through comparable recent sales and similar currently listed properties. The data is then adjusted to account for your home’s specific details and characteristics to arrive at a final valuation.
Once their report is complete, the FHA appraiser submits everything to your lender, who will provide you with a copy and discuss the results, how it may affect the loan, and the next steps you need to take. In most cases, the property will pass the FHA appraisal, and the loan will move on to final underwriting and approval.
FHA Home Appraisal Requirements
The US Department of Housing and Urban Development (HUD) oversees the Federal Housing Administration and establishes the FHA inspection criteria that homes must meet for FHA loan approval.
General Appraisal Requirements
The home must be structurally sound and expected to remain habitable for the life of the loan.
Water lines should be connected to a local utility. Where not possible or practical, well water must meet quality standards.
Sewage disposal must be fully functional, whether connected to a public sewer or septic system.
Due to lead risks, there cannot be any peeling or chipping paint on homes built pre-1978.
No dwellings or improvements may infringe on a neighboring property.
No neighboring dwellings or improvements may infringe on the subject property.
No overhead power lines may pass directly over the home or related improvements.
Access roads must be adequately maintained, allowing emergency access under all weather conditions.
The location should be free from external nuisances such as heavy traffic or a nearby airport.
No nearby explosion risks should exist, such as petroleum storage tanks or high-pressure lines.
The property cannot be contaminated by previous use or manufacture of methamphetamine.
Exterior Appraisal Requirements
The home’s foundation and load-bearing walls must have no cracks or other structural concerns.
The roof must not leak and cannot have more than three roofing layers.
The property must be free of termites and other wood-destroying organisms.
Water should sufficiently drain away from the home.
Swimming pools must adhere to all local regulations.
The soil on the property cannot have hazardous contaminants, such as heavy metals.
Inactive oil and gas wells must be permanently abandoned in a safe manner.
Interior Appraisal Requirements
All living units must have access to safe, potable water.
All living units must have at least one full bathroom.
All living units must have a kitchen with a working sink and stove hookup.
Sinks, showers, and toilets should all be functional.
Hot water must be available in the home.
The heating system must be adequate for the home's size.
If the home has an air conditioner, it must be functional.
Electrical systems need to be safe and capable of adequately powering the home.
Appliances conveyed as part of the sale must be operational.
Handrails should be installed where needed and sufficient to ensure safety.
Attics and crawl spaces must be accessible to appropriately service the property.
Is an FHA Appraisal the Same as a Home Inspection?
It's common for buyers to be confused about this since the terms are so often used interchangeably. But no, the FHA appraisal is not the same as a home inspection. While the two services are similar, there are some noteworthy differences.
FHA Appraisal
The FHA appraisal establishes a value for the home and ensures that it meets FHA appraisal guidelines. This involves a basic examination of the property, its features, and its mechanical systems. In most cases, your FHA appraiser will not thoroughly examine any particular aspect of the home.
All FHA loans – except for the FHA streamline refinance – require an appraisal, during which the property must meet basic FHA home inspection requirements.
FHA Home Inspection
An FHA home inspector does not attempt to set value for your home. Instead, the home inspection involves an in-depth look at your prospective purchase from top to bottom. This can include thoroughly examining heating and cooling functionality and condition, checking that all outlets are working and properly grounded, and inspecting plumbing and drainage systems for leaks and flow capacity.
FHA loans technically do not need a separate inspection. There are no FHA loan inspection requirements apart from what the appraiser looks for. However, obtaining a home inspection is always in the buyer's best interest as it can uncover hidden, potentially costly issues with the property.
How Much Will Your FHA Appraisal Cost?
HomeGuide reports that the average cost for an FHA appraisal is between $400 and $700. Why is the range so broad? It’s because a variety of factors can affect your FHA appraisal cost.
Appraisal rates in your local market – Like most things, appraisal costs will likely be higher in New York City than in Boise, ID.
The type of property – A single-family house can have different requirements than a condominium or multi-unit home.
The complexity of your appraisal – Appraising a 3,500-square-foot ranch home will likely take longer and cost more than appraising an 800-square-foot bungalow.
Unique characteristics of your home – FHA appraisers must use comparable recent sales to establish value for your home. When the property you’re purchasing is unique – such as a barndominium or tiny home – finding comps and adjusting values can be difficult and time-consuming.
The buyer is responsible for paying FHA appraisal costs in nearly all cases. However, buyers may sometimes be able to negotiate seller concessions to help pay for closing costs, including the appraisal.
When to pay for the appraisal varies by lender. Most require payment upfront when the appraisal is scheduled, although some may allow you to include the expense with your other closing costs.
What Fails an FHA Appraisal?
The majority of homes pass their FHA appraisal. In some cases, however, issues may need to be addressed before your loan can be approved. These are typically minor and easily remedied, although some problems may make it more challenging to obtain an FHA loan.
Some of the most common reasons why FHA appraisals fail include:
Health hazards, such as the presence of mold
A roof that leaks or has less than two years of expected life
Current termite infestation or past unrepaired damage
Dampness or water damage in the basement
Cracks in the foundation or other structural issues
Peeling paint in homes built before 1978
Sometimes, you may run into an issue not with the FHA inspection requirements but with the home's value. Like any mortgage type, a low appraisal could leave your purchase in limbo.
What if the Home Fails the FHA Appraisal?
So, what do you do if the home you want to buy fails its FHA appraisal? That depends on the reason why it failed. In some cases, you may still be able to purchase the property. In others, it might be impossible to salvage the deal, at least with an FHA mortgage.
Here are four problems you could encounter with your FHA appraisal and your options for moving forward.
1. Home’s Valuation Is Low
Sometimes, properties fail their FHA appraisal not because of their condition but simply because their value is not deemed to be as high as the contract purchase price.
Lenders decide how large of a loan to issue based on a property’s estimated worth. This is called the loan-to-value (LTV) ratio, which is 96.5% for most FHA-backed purchase loans. That means FHA lenders will loan up to 96.5% of a property’s appraised value, while borrowers are expected to contribute the remaining 3.5% as their down payment.
If your valuation comes in low, your lender may still be willing to let you borrow up to 96.5% of that lower amount. However, to go through with your deal, you will need to:
Get the seller to agree to a reduced purchase price or;
Come up with the difference in the form of a larger down payment.
Conversely, the FHA amendatory clause – standard with almost all FHA loans – allows you to walk away from your purchase and receive a refund of your earnest money deposit in the event of a low valuation.
2. Home Requires Minor Repairs
Sometimes, minor repairs may be necessary for your FHA loan to close. The seller generally completes these repairs at their expense, including improving the safety railing on a staircase, fixing a minor roof leak, or repairing a non-functional bathroom sink.
Minor repairs up to $5,000 can also be fixed after closing by using an FHA repair escrow. In addition, the seller could opt to put a portion of their proceeds into escrow if they're willing to cover the costs but want to avoid the hassle of hiring contractors and completing the work before closing.
There's also the FHA Limited 203(k) mortgage, which allows you to complete up to $75,000 in minor non-structural repairs after you purchase.
3. Home Requires Major Repairs
Occasionally, problems can require more substantial repairs. These could be issues like a roof that needs to be entirely replaced, extensive damage from an active termite infestation, or extreme disrepair of exterior siding.
Ideally, the seller would be willing to complete these repairs before closing, but that is not always the case. Because of the higher cost, effort, and required cash outlay, few sellers are willing to make significant repairs to meet FHA home inspection requirements.
If the home has major issues that the seller won't resolve, you may still be able to use the standard FHA 203(k) loan to make repairs. The FHA 203(k) is known as a renovation or rehab loan and lets you finance the cost of major home improvements.
4. Home Fails the FHA Appraisal
Sometimes, a home fails the FHA appraisal because there is no practical way to correct the deficiency. This is often the case when externalities outside the homeowners' control cause a property to fail, such as proximity to hazardous sites or nuisances.
It could also include serious repairs that are financially impractical, such as a $150,000 home that would need a new roof, a complete electrical and plumbing overhaul, and a large crack repaired in the pool.
In this situation, there's little chance of proceeding with an FHA loan. While other types of funding may be possible, most buyers would be better off looking elsewhere anyway.
Is It Hard to Pass an FHA Appraisal?
For most buyers, it is not difficult to pass an FHA appraisal. However, not all properties meet FHA appraisal guidelines, and depending on the home's condition, you may run into problems. These holdups are usually easily remedied, but sometimes, they can be a dealbreaker.
In other words, as long as the home does not appear to have any apparent issues and meets basic FHA criteria, it will likely pass.
Next Steps After an FHA Appraisal
The home you're buying has passed its appraisal – what happens next? Assuming the title search has also been completed successfully, your loan will move into the final underwriting process.
This is when underwriters review all your documents to ensure everything is in place, verify that nothing has materially changed with your credit or finances since pre-approval, and then give the final go-ahead for closing.
Preparing for Your FHA Home Inspection
As a buyer, there's ultimately little that you can do to prepare for an FHA home appraisal. Thankfully, most properties pass their inspection, although sometimes minor repairs may be needed. If significant problems are uncovered, you may still be able to proceed with your purchase. However, most of the time, you'll likely need to find another house or consider a different type of mortgage.
If you're set on buying a home that cannot pass FHA appraisal guidelines, apply with a conventional lender to explore your mortgage options that don't adhere to FHA loan inspection requirements.
