An FHA appraisal is required for an FHA-insured mortgage loan. The appraisal is carried out at the request of the mortgage lender who also arranges for the appraisal to take place by selecting and FHA approved appraiser.
Borrowers often wonder about the nature of this appraisal along with many other things related to FHA loan appraisal including the costs of an appraisal, who pays for the FHA loan appraisal, can the costs be shared between the borrower and the lender, and whether these costs are in any way negotiable.
The FHA loan appraisal is not a complicated process and it can be carried out in a matter of days, yet it’s an important process that both sellers and buyers often stress about.
In this article, I offer questions about the financial side of FHA-specific appraisals and discuss the somewhat different nature of this appraisal type compared to conventional appraisals.
I also touch on issues related to the validity of FHA appraisals, the way they’re carried out, and other commonly asked questions about this type of appraisal.
Who Supports the Costs of an FHA Loan Appraisal?
This is an important question since borrowers are looking for ways to save on closing costs as much as possible and they need to be informed of any and all expenses related to an FHA mortgage loan.
The Department of Housing and Urban Development (HUD, for short) that manages the FHA loan program sets out the guidelines for this loan program, determining many of the aspects that govern the FHA loan program.
Therefore, the HUD is the one that requires a property appraisal for all FHA purchase loans and the appraisal must be done by a certified FHA appraisal.
Other than the requirement for an appraisal and the minimum property requirements that must be met, the HUD does not specify who pays for the FHA loan appraisal.
This doesn’t mean that the costs are really up for negotiation between the parties, because usually, the responsibility to pay for an FHA home appraisal falls on the buyer, who will exclusively support the costs. The mortgage lender will only arrange for the appraisal but will not pay for it.
Moreover, the costs of the appraisal cannot be rolled into the closing costs, and therefore, payment of these costs must be paid upfront by the borrower.
Certain mortgage lenders may offer to cover the costs of the appraisal as a way to attract customers and to incentivise them, but most times, the mortgage lender will ask the seller to support the costs of the appraisal.
Therefore, usually, the appraisal costs are not negotiable, nor is the lender keen on paying for it or sharing the expenses with the borrower.
How Much Does the Appraisal Cost?
The goods news is that an FHA appraisal is not that expensive, at least not in the larger context of buying a house, but the cost can vary depending on certain features of the property.
The cost of the appraisal usually varies between $300 and $500. Because the home appraiser is selected by the mortgage lender, you essentially don’t have a say in choosing an individual or company that offers a lower price, for example.
The costs of the appraisal can be influenced by multiple factors related to the property itself including the size of the land that comes with the property, square footage of the property, location, type of property, whether there’s any extensive damage, and of course, the company or individual carrying out the appraisal.
As a compulsory step in financing a property with an FHA mortgage loan, there is no other option for borrowers but to pay for the appraisal costs, unless they can find a mortgage lender that will pay for it instead.
What Does an Appraiser Do?
I mentioned that the appraisal is not a complicated procedure, but there are a few things that the appraiser must do to draw up an appraisal report.
The purpose of an FHA loan appraiser is twofold:
- The appraiser will make an evaluation of the market value and resale potential of the property, and
- Determines if the property meets the minimum habitability standards required by the HUD.
These two things constitute the so-called ‘double duty’ of the appraiser who will not only evaluate the market value of the property but will also look at the condition of the property with the goal to determine if that property is safe and healthy for occupancy.
The appraiser will draw up an appraisal report, documenting the visual inspection of the property and comparable sales in the area where the property is located.
During the visual inspection, the appraiser is concerned with the general condition of the property, examining things such as:
- State of the roof and foundation;
- Making sure rooms have a suitable egress;
- Making sure stairs and stairways have handrails;
- Ensuring that the lot on which the property is built is sloped in a way to allow proper drainage of water;
- The heating and cooling systems are capable of providing enough heat/cold;
- Whether there is any lead-based paint in the home that may be chipping or peeling, etc.
These are some of the things that the appraiser will document in their report. The appraiser will take pictures of exteriors and interiors and of any other structure or improvement to the property that would increase its value on the market (e.g a pool or a patio).
While the guidelines set by the HUD are oriented towards ensuring the safety and health of the occupants, the FHA appraisal is different from a home inspection or a conventional loan appraisal.
FHA Appraisal vs Conventional Loan Appraisal vs Home Inspection
While they all concerned with the condition of the property, these are separate things that have different goals.
The goal of a conventional loan appraisal is to determine the market value of the property. A conventional loan appraisal is not interested in the condition of the property from a safety and health perspective, the reason for the appraisal is to determine the market value.
An FHA appraisal is different in the sense that beyond the goal of determining market value, it also needs to make sure that the property is safe for occupancy. It’s not an in-depth investigation of the condition of the property.
A home inspection is a more in-depth and full investigation into the current state of the property and its finality is to look out for the interests of the buyer.
Therefore, it can be said that the FHA appraisal looks out for the interest of the FHA mortgage lender and HUD, while a home inspection is carried out in the interest of the buyer.
While FHA appraisals are compulsory for FHA mortgage loans, a home inspection is not, although the HUD strongly recommends getting one done.
How Long Does the Appraisal Take?
The FHA appraisal can be completed in a matter of days if the appraiser is efficient and doesn’t have a high workload.
The visual inspection of the property is usually carried out on the same day the appraiser visits the property.
It may take a couple of more days for the appraiser to gather information of comparable property sales in the area and draw up the report, however, everything should be completed within a week at most.
Can the FHA Appraisal Expire?
The FHA appraisal is usually only valid for 120 days. After this period, a new appraisal must be carried out. However, in certain situations, the original appraisal can be extended or updated.
The appraisal must be valid on the date the loan is funded, which is on or very near to the closing date.
The appraisal can be extended in the following cases:
- Lender approves the borrower, or the HUD issues a firm commitment before the expiration date;
- Buyer signs a valid sales contract before the date of expiration;
- New case number assignment by the lender before expiry date.
In the first two cases, the validity can be extended with 30 days, while in the third case the updated FHA appraisal report will remain valid for 240 days.
The HUD guidelines don’t mention anything about the party responsible for paying for the FHA loan appraisal, but it’s standard practice for the borrower to pay for it in its entirety. The appraisal costs between $300 and $500, which must be paid upfront by the borrower.
It’s important to understand that an FHA appraisal is very different from a home inspection, and even though a home inspection is not required for closing on an FHA loan, the HUD still recommends it for borrowers.
This recommendation is for good reason as a home inspection is a detailed evaluation of the property’s condition unlike an FHA appraisal, which only needs to determine if the minimum safety and health requirements of the HUD are met.
Now that you know more about how an appraisal stacks up to a home inspection, I encourage you to get one done by an independent home inspection before you decide to close on a home.