What Is a Home Appraisal?
If you’re using an FHA mortgage loan to purchase a house, an appraisal will need to be done before the loan can close.
A home appraisal is an estimate of the current market value of a property. When a property is purchased or refinanced, a home appraisal is almost always required.
FHA Lenders use the appraisal to calculate the loan-to-value ratio of the loan. And to make sure the borrower is not paying more than the fair market value of the home.
This not only protects the borrower but the lender as well.
If you’re a first-time buyer or seller, you must know about the different factors that a home appraiser looks at.
Who Pays for the Appraisal and How Much are they
The FHA buyer will pay for the appraisal upfront before closing. The average FHA appraisal costs are between $300-$500, according to the Uniform Residential Appraisal Report (URAR). If you’re applying for an FHA streamline refinance, the FHA guidelines do not require a home appraisal.
Main factors that affect the cost of an FHA appraisal
- Square footage of the home
- Property type
- Location of the subject property
- How much land is included in the property
- Homes with extensive damage or repairs
- The individual or company doing the appraisal
What FHA Appraisers look at
When buying a home using an FHA loan, you will be required to get an FHA appraisal. First, the home appraisal is ordered by the mortgage lender. Next, the appraiser will perform a basic inspection on the property to ensure it meets the HUD property standards for FHA loans. For real estate to be classified as FHA approved, it must pass the HUD’s FHA property guidelines.
The FHA Appraisal Process
- Inspect the property’s interior and exterior structure and quality
- Ensure lead-based paint is not present
- Check for cracks, leaks, and damage to the exterior
- Walls and ceilings in good condition without cracks or holes
- Check the quality of fixtures, plumbing, and appliances
- Make a note of any upgrades that may increase the value
- Ensure the Landscape is in good condition
- Check central heating and cooling systems
- Take photos of the front, sides, and back of the home. Along with photos of any upgrades that increase the value of the home
- Photos showing the condition of the lot
- Include a copy of the location map showing the comparable sales
FHA Minimum Property Standards
The Housing and Urban Development, or HUD, requires the appraiser to check for various health and safety items as well as quality construction items to ensure the property meets HUD’s minimum property requirements and meets the HUD Handbook 4150.2 for hazards and adverse conditions such as:
FHA Minimum Property Standards
The home must be complete and "marketable"
The interior and exterior should be a complete home. If the kitchen is not complete, or other structures are not present, it will not meet the FHA home requirements.
Must be accessible
The property should have public access and not require trespassing on private property to enter.
The home should be safe to access from a public road.
Free from Hazards
The property should be free from any hazards such as lead-based paint, visible electrically wiring, etc.
FHA appraisal checklist
- Must be a complete marketable property
- Adequate heating system
- Clear of any lead-based paints
- No exposed electric wiring
- Full exterior walls that are undamaged
- No hazards in the home
- Quality construction
- Proper drainage
- A quality roof not in need of repair
- Safe and public access to the home
- Safe drinking water
- Crawl spaces must have natural ventilation
- Gas, water, sewage, and electric utilities available
FHA Appraisal Changes
The FHA 4000.1 Handbook has made new revisions in the past few years to ensure FHA home appraisals are more accurate. Regrettably, in the early 2000s, there were numerous inaccurate FHA appraisals done the values of that inflated home to allow FHA lenders to close a loan more easily.
As a result, HUD has cracked down on this practice and has made some revisions to the appraisal process and minimum property standards (MPS) in the FHA 4000.1 HUD Handbook that went into effect on September 14th, 2015. These revisions must be met to qualify for FHA financing. These include many health and safety inspections.
FHA appraisers are now required to:
- Ensure all appliances are operational
- Fully access the attic space if able to do so
- Check water heater functionality.
- The “Inspection” portion is not referred to as “observation.”
- A roof that needs to be replaced within 2 years must be reported.
- Analyze and report marketability of homes in Airport zones
- The income appraisal approach must be considered. (High priced homes in low-income areas may have a lower market value)
How is the appraised value of a home determined?
An appraiser will determine the market value by looking at comparable home sales in your area over the past 6 months. Next, they will compare the home’s square footage, the number of bedrooms and bathrooms, the home’s condition, and any special features. This information is included in the appraisal report and sent to the FHA-Approved lender.
How to increase home value for an appraisal
- Clean and touch up interior walls and repair any damage.
- The landscape should be mowed. bushes and trees trimmed
- Exterior paint should be in good condition without cracks.
- Clean the home top to bottom and remove all clutter
- Touch up paint on moldings and doors
- Open all the windows and blinds to allow more light in
- Steam clean the carpets and polish tile or wood floors
- Repair any damaged fixtures, door handles, fans, and lights.
A home inspection is not required for a home loan. The appraisal the lender receives is enough to show the property meets the FHA requirements. However, getting a home inspection prior to closing is highly recommended. The appraisal does not check certain health and safety features such as operating ceiling fans or light fixtures.
Home inspections will be much more in-depth and will point out anything that needs to be replaced or will need to be replaced in the near future. The average home inspection cost is around $315, according to Trulia.
Check the HUD website for more information on home appraisals
You can find more information on HUD guidelines for appraisals and minimum property requirements for FHA on the HUD website. You can also view the HUD minimum property standards for the housing handbook on the official HUD website.