It’s safe to say anyone who was in the market to buy a home last year knows that 2016 was a hot and heavy sellers’ market across the country. We saw far more buyers than homes on the market. And, while the conventional loan remained the most popular among these homebuyers, the FHA-backed loan accounted for 17.5 percent of all purchase and refinanced loans at this time last year.
As a testament to the program’s popularity, first quarter home loan originations last year decreased 8 percent to 2015’s level yet FHA’s loan share increased 7 percent — the fifth consecutive quarter with an increase.
Since so many homebuyers are using the FHA-backed loan, and there are many aspects of the program that differ from a conventional loan, today I’d like to clarify the confusion surrounding the FHA appraisal.
What is an appraisal?
Quite simply, an appraisal is an evaluation of a home’s current market value. Yes, real estate agents determine this value for their listing clients and use many of the same methods that a professional appraiser uses, but the home appraisal (demanded by the lender) uses an appraiser of its choosing, and this person has the final say (usually) on how much a home is worth.
Lenders naturally want to ensure that the home they are lending money on is worth at least what the buyer is paying for it. To determine its value, the appraiser will visit the home, taking a look at the structure, roofing, foundation, lot size, location within the neighborhood and more.
He or she will consider the home’s interior as well, verifying the square footage (which is determined by the exterior measurements of the home), making a note of any improvements. Back at the office, the appraiser will research recent real estate activity in the neighborhood, comparing the home to those which have sold, to come up with the value of the home.
About FHA appraisals
Just as the lender wants to ensure the home is worth the money it is lending, FHA wants to make sure the house is worth the amount it’s insuring. But, the FHA appraisal goes a step further – ensuring that the home meets HUD’s minimum health and safety standards.
Therefore, all homes purchased with an FHA-backed loan must be appraised by an HUD-approved home appraiser and individual property requirements must be met for the FHA to finally ok the purchase.
As mentioned above, most of these have to do with the “safety and well-being of the occupants,” according to FHA. These requirements include:
- All stairways must have handrails
- All bedrooms must have at least one closet
- There must be “access/egress” from each bedroom to the outside of the home
- The FHA inspector must find no structural problems, such as damage to the foundation or roof
- The appraiser will check the lot’s grading to ensure that it slopes away from the home to prevent water intrusion into the foundation or basement
- If the home was built before 1978 and the appraiser suspects it contains lead-based paint, he or she will look for chipped and peeling paint.
- The heating system must be in good working condition
Now, if any of these requirements aren’t met, the appraiser will mark them as “subject to repair,” which means that the seller will need to repair the problems before FHA will insure the loan.
If the FHA appraiser determines that the home isn’t worth what the buyer has agreed to pay for it, negotiations on price re-open and there are a number of ways to approach them. If the seller doesn’t agree to fix the problems, on the other hand, the sale will not go through. Thankfully, unless the required repairs are prohibitively costly (such as adding doors or windows to provide egress to the home’s exterior), most sellers understand their obligation to make them so the deal can go through.
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