As a Real Estate Investor or home buyer, you’re probably familiar with FHA appraisals. Appraisals are important because they help to protect both the lender and the borrower. Lenders like appraisals because the appraisal confirms that the property is worth enough to cover the loan. Likewise, borrowers like appraisals because it reassures the borrower that they aren’t overpaying for a property.
If you’re looking to buy a house for the price of a car, FHA financing can be used to finance both single-family houses as well as small multifamily investment properties, as long as the house serves as your primary residence.
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FHA BACKGROUND
The Federal Housing Administration, or FHA, has been around for nearly a century and was founded in 1934. The FHA is a government-backed mortgage insurance company that insures mortgages for people who can’t afford a large down payment. Stepping in as a mortgage guarantor of sorts makes it easier for people to buy a home, as the lender knows that if push comes to shove and the borrower defaults on their loan, FHA will pick up the tab. With inflation and mortgage interest rates reaching new heights, it pays to stay current on lending practices. In this blog, we’ll take a look at what’s changing with the FHA appraisal process in 2022. Keep reading to learn more!
WHAT IS AN FHA APPRAISAL?
An FHA appraisal is required by lenders to ensure that a potential property is a good investment. Although, as mentioned earlier, FHA guarantees repayment of a large portion of the loan if a homeowner defaults, banks prefer not to find themselves in this situation. After all, the lender makes money by collecting interest payments on the mortgage, so having the loan paid off early by FHA runs counter to this.
One of FHA’s top concerns when evaluating an appraisal is ensuring that the property itself is durable, safe, and fit for habitation. The hired appraiser will look at the property inside and out and check for health and safety issues— for instance, the structural integrity of the property, electrical wiring, and mold or mildew issues. Additionally, the appraiser will look at factors that impact the house’s value— for instance, a swimming pool, a garage, and the condition of the home, and major systems such as the roof or furnace. Appraisers also evaluate the features of comparable homes that were recently sold. So even if you have no interest in keeping up with the Joneses, FHA takes an active interest in them from a valuation perspective!
BASIC COMPONENTS OF AN FHA APPRAISAL
The FHA appraiser looks for the good, the bad, and the ugly regarding the value of the home and any factors that could prevent it from being occupied long-term, as these factors contribute to the property’s longevity and marketability. Two key areas of focus for the appraisal are pests and paint type. Pests don’t refer to an ant or spider here and there, but rather whether there is an infestation or any damage to the property— for instance, damage to supporting wood beams caused by termites or carpenter ants. Paint refers less to the color or style of paint and more to its safety, specifically, if there are areas of the house that have lead-based paint. Houses built before 1972 are more likely to have used lead-based paint versus newer houses.
Other areas on the appraiser’s checklist include the following:
· THE PHYSICAL CONDITION OF THE BUILDING
° The foundation, roof, and exterior must not be damaged.
° A big NO to insect infestation
° The wiring and the electrical systems must not be exposed.
° Sufficient ventilation of attics.
· THE LIVABILITY OF THE BUILDING
° The utilities must be in good working condition including heat and clean water.
° A shielded sanitary sewage disposal system must be present.
° Lead paints should not be used.
° Fire codes and applicable safety codes should be met.
· THE CONDITION OF THE PROPERTY SITE
° The soil should not be contaminated.
° The route of the drain pipes must point away from the home.
° The property must be accessible and safe.
Market Comparables
° The appraiser evaluates the price of two comparable properties that have sold within the last 90 days.
° In a volatile market, a period of 30-60 days will be used and three comparable properties will be selected.
° Additionally, market comparables will be selected for properties that have not closed yet and are still listed for sale. Typically the appraiser will select two properties for this analysis.
ARE THERE ANY POTENTIAL ISSUES THAT COULD ARISE DURING OR AFTER THE FHA APPRAISAL PROCESS?
A clean FHA appraisal puts you one step closer to owning a home, but what happens if the appraisal report raises issues or has a lower than expected value?
° IF THE FHA APPRAISAL REQUIRES REPAIRS
In some cases, the lender will conditionally approve a loan if the appraiser states that renovations or updates to the home are required to bring it into compliance with safety standards. In such instances, the buyer can negotiate with the seller to determine whether these renovations will be paid for by the seller or will instead be paid in whole or in part by the buyer.
° A LOW-PRICE APPRAISAL
If the appraised value of the home comes in lower than the sales price, then, much as with the renovation scenario above, the buyer and seller will need to negotiate to determine how this lower value will be split. Buyers sometimes despair in the face of a lower appraised value, but this decreased value can force a seller’s hand to provide a price that while lower, is closer to market.
FINAL THOUGHTS
An FHA appraisal is an evaluation of a property carried out by a qualified appraiser for the Federal Housing Administration. The main purposes of the appraisal are to establish the market value of the property and to ensure that it meets HUD’s minimum property standards. To pass muster, the home must be deemed safe, sanitary, and structurally sound. If there are any issues discovered during or after the appraisal process, the lender will require that the issues be corrected in order for the loan to close.
RECOMMENDED READ: 5 REAL ESTATE GOALS EVERY SMART PROPERTY INVESTOR SHOULD SET
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