When applying for a Federal Housing Administration-insured mortgage loan, borrowers often wonder whether a home inspection will also be required for approval, or if the home appraisal is enough for an FHA loan to close.
This is a valid question because there are differences between the two and the compulsory FHA home appraisal is a bit different from the conventional home appraisal performed with other loans.
But to address the question — no, a home inspection is not a compulsory requirement of the Department of Housing and Urban Development, however, an FHA-specific property appraisal is.
To understand the difference between the two and why you should still consider a home inspection as well, I encourage you to read my article on the topic, where I explain everything in detail.
How is a Home Inspection Different from a Home Appraisal?
Because many people aren’t sure if there are differences between home inspection and home appraisal, or if there are, what these differences are, I’ll start by explaining what they cover and how they compare.
Home Appraisal
If you take any other home appraisal imposed by a conventional loan, the scope is to determine the market value of the property.
To this end, the appraiser will look at recent sales in the area, will compare the state of these properties to the one being reviewed and will draw up an appraisal report at the end in which they will give their opinion about the market value.
This is what a conventional property appraisal focuses on, however, FHA-specific appraisals are a bit different because the appraiser has a double duty to also check that the property meets the minimum standards of health and safety of the HUD.
This rather important issue — the habitability of a property — isn’t in the focus of other loan programs, and it’s something specific to FHA loans.
When evaluating the habitability of a home, the appraiser will check the state of the roof, the foundation, whether rooms have an acceptable fire egress, whether the walls contain lead-based paint, whether stairs have a stairway, whether there are any problems on the lot the house is built on, etc.
The findings of the appraiser will be put into the appraisal report. Small issues that aren’t a health and safety concern will not prevent the loan from closing, however, deal-breaker irregularities will prevent the loan from closing.
For example, the lack of a fire egress in a bedroom or a fire egress that’s too small constitutes a deal-breaker issue that will prevent the loan from closing.
Similarly, an incline of the lot on which the property is built on so that water flows to the property and not away from it is also an issue that will potentially damage the very foundation of the house, and it’s something that might prevent the FHA loan from getting to the next stage.
Home Inspection
So, while a home appraisal focuses on two major things — market value of the property and habitability — the home inspection is a comprehensive insight into the real condition of the house.
Therefore, a home inspection is an evaluation of the overall condition of a property. The goal is to inform the buyer about the general state of the property, so they can make an informed decision when deciding on buying it or not.
An FHA loan does not require a home inspection, but it’s a good idea to get one done regardless, so much so that it requires mortgage lenders to provide disclosure documents in which borrowers are encouraged to get a home inspection done.
And for reasons I’m going to explain below, I too would encourage you to listen to the recommendation of the FHA and get a home inspection for your protection and peace of mind.
Home Inspection is NOT Required for an FHA Loan Approval
While the FHA recommends buyers to get a comprehensive home inspection done, they do not carry it out themselves, stating that “a home inspection will only occur if you arrange for one. FHA does not perform a home inspection.”
A home inspection is carried out by a licenced inspector and you must arrange for a home inspection yourself should you want your prospective home evaluated more comprehensively than what an appraisal might offer.
Therefore, if you’re in doubt whether it’s necessary to get a home inspection for an FHA loan approval, you can rest easy that it isn’t, however, you might still want to consider getting one done.
There are a few reasons why you should get one done. After all, a home is a huge investment and you should know the true condition of the property and how much further investment it may require repairing or replacing certain things.
Another reason why you might rethink the idea of not having a comprehensive and independent home inspection is that it only cost a few hundred dollars.
Sure, budget might be tight, and you may not want to roll out a few hundred bucks, but at least you’ll know exactly what you’re getting into when buying the property.
Think of it as an insurance of sorts from future, potentially unwanted surprises that you might not be happy to uncover later.
Of course, if you’re not in any doubt about the condition of the property and you don’t think it’s worth getting a home inspection done, no-one can force you to and the FHA loan can close without it, but not without a home appraisal, which is an indispensable condition to closing an FHA loan.
Home Appraisal IS Required for an FHA Loan Approval
While you can still close an FHA loan without a home inspection, you cannot do so without a home appraisal, which is a compulsory step in any FHA loan.
Without a home appraisal, your FHA loan approval won’t happen, and the things uncovered by the FHA appraiser will have a huge bearing on the outcome of your FHA loan request.
As I mentioned earlier, an FHA home appraisal is a bit different than a home appraisal related to a conventional mortgage.
Because the HUD requires certain habitability conditions to be met, the FHA appraiser must not only give its opinion about the market value of the property, but will also need to evaluate its habitability.
The HUD imposes certain minimal standards for health and safety that properties should meet in order for them to be considered as financeable with an FHA loan.
If the issues uncovered during the home appraisal are minor and fixable, there are no concerns about the FHA loan moving forward.
For example, a small issue like a leaky faucet or a countertop that needs to be replaced are easily fixable issues, and according to the newest FHA guidelines if the buyers agree to buy the property ‘as is’, the sale can close without the seller being forced to fix these minor problems.
But if the appraiser uncovers major issues that make the property inhabitable or that constitute a safety issue, the FHA loan might not get approved unless these things are fixed prior to the sale closing.
Likewise, if the issues are of such a nature that are not fixable in any way, the FHA loan will fall through in this stage since the property doesn’t meet the minimum safety standards required by the HUD.
As you can see, there are rather strict guidelines that govern the FHA loan approval and appraisal process, and some sellers might be in the right to refuse offers from borrowers that are planning to finance their homes with an FHA loan.
As a borrower, you shouldn’t worry about sellers not accepting this type of loan, even though there are some requirements to be met since most modern homes will pass the FHA appraisal with flying colors.
If you’re not considering a home that’s in a state of disrepair or if the seller is willing to carry out the needed repairs, there is no reason for an FHA loan to fall through at this stage.
In Summary…
To recap the points raised in this article, there is a difference between home inspection and home appraisal. Plus, one is compulsory and the other optional, although recommended by the FHA.
An FHA loan can be approved without a comprehensive and independent home inspection. Still, it’s a good idea to get one done regardless, especially if you’re concerned about the condition of the property.
An FHA loan cannot and will not close without a home appraisal, which determines the market value and habitability of the property.
I hope this article has cleared up the confusion that exists between the two types of evaluation systems, and you now have a better understanding of the goal of each, and which one you need to get an FHA loan approval.
I also hope that you follow the recommendation of the FHA on getting a home inspection done just to make sure you have all the information needed to go ahead with your purchase.