An often-feared step in the loan process (especially by sellers), the FHA appraisal is a compulsory investigation into the habitability and market value of the property being sold.
The appraisal is carried out by an FHA-approved home appraiser selected by the mortgage lender, and unlike many of the other steps involved in the application for an FHA loan, the appraisal is generally short and straightforward.
But since it’s an important aspect of an FHA loan, I’m going to discuss the moment in which the appraisal takes place, the conditions in which it takes place, how long does the appraisal take, and who is responsible for paying for the appraisal.
These are all questions that I’m going to address along with other aspects related to appraisals, so you’ll know what to expect from an FHA-specific property appraisal and whether there’s anything you need to do.
When Does the FHA Appraisal Take Place?
Since the mortgage lender requires a signed copy of the agreement between a home buyer and the seller, the appraisal usually happens right after the seller and buyer have signed the contract of sale.
After the agreement is signed, the mortgage lender will arrange for the appraisal, which is carried out by an FHA certified appraiser.
Even though the mortgage lender is the one ordering the appraisal, the costs will be supported by the buyer.
Payment for the appraisal is requested upfront and unlike other costs related to the mortgage, the cost of the appraisal is not rolled into the closing costs. This is the standard practice, though variations might exist.
Therefore, to recap in a broader timeline, the FHA approval process and appraisal process usually involves the following steps:
- Home buyer seeks and receives pre-approval from a bank or mortgage lender that offers FHA-insured mortgage loans.
- The bank or mortgage lender pre-approves an amount, which the buyer will use as a guideline to search for a house that is within the price range they were approved for.
- Once the buyer finds a home that both meets their needs and it’s within the approved budget, they make an offer to the seller.
- In an ideal scenario, the seller accepts the offer and they sign an agreement with the buyer.
- The buyer takes the signed agreement to the lender and the loan process moves to the next phase, which is the appraisal.
An FHA appraisal is a bit different than a conventional loan appraisal because it has a different finality as you will see in the following section of this article, where I explain the differences between conventional loan appraisals and FHA loan appraisals.
How is an FHA Appraisal Different?
Usually, determining the market value of a property is what most conventional appraisals are concerned with.
While this holds true for FHA appraisals too, they also seek to determine the overall condition of the property, more specifically whether the property meets the minimum safety and health standards of the HUD (Department of Housing and Urban Development).
Conventional appraisals are only concerned with the condition of the property in terms of establishing market value. These appraisals aren’t focusing on habitability and safety concerns, and the loan process can proceed even if there are issues that would not fly under the safety and health requirements imposed by the HUD on FHA loans.
This “double duty” of the appraiser is what makes FHA appraisals unique compared to conventional appraisals, which are only concerned with the current market value of the property.
Because of this double duty, FHA appraisals also take a bit more time, especially if there are discrepancies uncovered during the inspection, which must be solved for the deal to move forward.
Therefore, if the FHA appraiser finds things that aren’t to the minimum health and safety standards set by HUD, the transaction will be put on hold until the issues are resolved.
Here is a short overview of the things the appraiser will examine to make sure the property can get the green light and the loan process can move forward:
- Home must be habitable, comfortable, and without hazards to the occupants;
- Foundation and lot inspections to make sure that water doesn’t drain towards the house, affecting its foundation (if the lot is sloped it should be so that the water drains away from the foundation and not towards the foundation);
- All bedrooms should feature a fire egress, which should be large enough to allow egress (e.g. a window is enough provided that it’s sufficiently large to allow egress in case of a fire);
- Old homes can have lead paint, which may be peeling or chipping. The appraiser will note the need to correct these issues;
- Steps and stairways must have a handrail for safety reasons;
- Both the foundation and the roof must be in a good state of repair to prevent moisture from entering the home;
- The heating system must be efficient enough to create healthy and comfortable living conditions.
These are, in a nutshell, the minimum standards required by the HUD to greenlight a property for occupancy. The appraisal must be carried out by a licensed, HUD-approved home appraiser.
How Long Does an FHA Appraisal Take?
To get back to our question of how long the FHA appraisal is, it helps to understand how exactly the appraisal process is carried out by the appraiser.
The appraiser must complete the following set of inspections:
- Visual inspection of the property both inside and out;
- Photo documentation of the property to be included in the loan file. To this end the appraiser will take photos of the sides, front and rear of the home, and it will include any patios, pools, or other constructions that could add value to the property;
- Examining comparable sales in the area, and taking photos of those properties;
- Inspecting the grade of the lot.
The appraiser will document everything in an appraisal report that will highlight any issues that could prevent the process from moving forward.
The visual inspection can usually be completed in a couple of hours, but it will take a couple of more days for the appraiser to evaluate how the property stacks up to comparable sales in the area.
Usually, the entire appraisal process can be completed in a matter of days. Much depends also on the workload of the appraiser and how efficient they are. Most times, the FHA appraisal is completed within a week.
Sellers often fear FHA appraisals arguing that they’re excessively unfair or unnecessarily strict. However, in practice, most discrepancies found during the appraisal are correctable and once they’re corrected, things can move forward quickly.
Of course, there are “deal-breaker” issues as well (e.g. serious damage to roof or foundation, no egress in bedrooms, etc.), which can’t be fixed easily and would involve major repair works that need to be carried out.
If the discrepancies raised are fixed to the satisfaction of the appraiser, the deal can move forward without any issues.
Therefore, most modern properties will meet the minimum safety and health standards required by the HUD.
Also, sellers shouldn’t worry about minor works (e.g. leaky faucets, countertops that need replacement) since the new guidelines allow the sale to go through if the buyer agrees to buy the property ‘as is’ even with these small issues.
Another question that I often hear from home buyers concerns the validity period of the appraisal, namely buyers want to know how long is an FHA appraisal valid for?
Usually, the initial FHA appraisal is valid for 120 days, but it can be extended to up to 240 days if the initial appraisal is updated.
Does FHA Require Home Inspections?
Home inspections are different from home appraisals and although the FHA encourages you to get a home inspection done as well, it’s not a compulsory requirement.
Nevertheless, there are good reasons to get a home inspection done as well. Yes, it does cost money (costs a couple of hundred dollars), but it may save you from unexpected surprises down the road.
Home inspections are different from home appraisals since they offer a more comprehensive insight into the overall condition of the property.
FHA-specific property appraisals are different from conventional appraisals in the sense that the appraiser has a double duty to evaluate both the market value and habitability of the property in question.
The length of the property appraisal depends on various factors including the workload and efficiency of the appraiser; however, it rarely takes longer than a week.
The mortgage lender will select a HUD-approved appraiser and arrange for the appraisal. The cost of the appraisal is supported by the buyer, and payment is usually due upfront.
Although the FHA does not require a home inspection, if you can, I recommend having one done for a more thorough assessment of the property’s condition.
As you can see, the home appraisal process doesn’t drag out for too long and there are very specific things that must be evaluated during this step of the FHA loan process.