FHA loans typically account for about 10% of all mortgage loans made in the United States, and they’re regulated by the Department of Housing and Urban Development or HUD. As the FHA regulator, HUD defines all of the regulations for FHA loans, including those for home inspections and appraisals.
Property Appraisal vs. Home Inspection
While many believe the opposite, an FHA loan does not require a full home inspection (not to be confused with a home appraisal, discussed below). HUD does strongly encourage home inspections, and they provide a disclosure that describes the value of a home inspection. But, home inspections per se are not required, as FHA properties can now be purchased “as is.” The misconception about property inspections arose from an old HUD guideline that required all FHA-financed properties to have clear pest inspections, but that requirement was dropped years ago.
In contrast to a home inspection, a property appraisal is required for all FHA loans. A home inspector’s primary concern is the health of the property, such as necessary repairs, but an appraiser’s primary focus is the market value of the property.
FHA appraisers assess the current market value of the home, along with its condition. In this way, the appraiser gets two jobs done in one.
What Do FHA Appraisers Do?
The actual actions FHA appraisers take are as follows:
- They physically measure, photograph, and inspect the interior and exterior of the home.
- They photograph the street on which the property is located and look at the plat map to make sure there are no “adverse external influences” – like a nearby freeway, shopping center or train tracks – that should be noted.
- They gather comparable sales data from within the immediate “market area of influence” in which the property is located.
- They prepare a formal appraisal report on a HUD-approved appraisal form in which they describe key attributes of the property, discuss health and safety concerns, and compare the property to other recently closed (usually within the last 90 days) sales in the neighborhood (market area of influence).
- They estimate the market value of the property.
FHA Appraisals Review Health & Safety
FHA property appraisers also take note of what are commonly called “health and safety issues.”
For example, the appraiser will do a simple examination of the home’s electrical system to make sure it’s working properly, and there won’t be any hazards for the homeowner, e.g. no exposed wiring.
The appraiser will also inspect the plumbing system to check for leaks that could damage the property over time, and she will also check the heating system to make sure it can function without any problems.
FHA appraisers will also check for encroachments. An encroachment develops when one home’s structures invade another person’s property. For example, if a neighbor’s garage crosses the property line of the subject property, the FHA appraiser will call it out and it could put a halt to FHA financing altogether – but this is very rare.
And finally, FHA appraisers will also note other concerns such as badly peeling paint, missing handrails, broken windows, and missing or badly worn floor coverings.
FHA appraisers, however, are not that much more particular with their inspections than appraisers are for other types of financing. And, borrowers should not be overly concerned by the nature of these inspections, as properties do NOT need to be in pristine condition. Appraisers tend to only call our glaring condition issues and will often turn a blind eye to “ordinary wear and tear” and/or minor issues.
You can find out more about FHA appraisal inspection guidelines by reviewing the HUD handbook 4000.1.
