FHA Appraisal: Guidelines and How it Works

If you’re applying for a mortgage backed by the Federal Housing Administration (FHA), in most cases the lender requires an FHA appraisal to verify both the value and the condition of the home you’re buying or refinancing. FHA appraisal guidelines tend to be more stringent than conventional appraisal rules, but they also come with extra protections worth knowing if you’re buying a home with an FHA loan.

What is an FHA appraisal?

An FHA appraisal is a written report that assesses a home’s value and condition based on FHA guidelines. Only an FHA-approved appraiser can complete this type of appraisal, requiring a more detailed analysis and inspection than a conventional appraisal.

In most cases, an FHA appraisal is required if you’re buying or refinancing a home with an FHA loan.

When do you need an FHA appraisal?

Lenders require an FHA appraisal for the following types of FHA loans.

• FHA purchase. Unlike conventional purchase loans, there is no appraisal waiver option if you buy a home with an FHA loan.
• FHA cash-out refinance. An appraisal is required if you’re borrowing more than you currently owe with an FHA cash-out refinance.
• FHA 203(k). The FHA 203(k) loan is a fixer-upper loan, and an appraisal is required to estimate the home’s value after improvements are finished.
• Reverse mortgage. The FHA home equity conversion mortgage (HECM), commonly known as a reverse mortgage, is a specialized loan for borrowers at least 62 years of age. The program requires an appraisal to determine how much equity a senior homeowner can access.

There is one FHA loan type that doesn’t require an FHA appraisal:

• FHA streamline. You won’t need an FHA appraisal or income documents to qualify for an FHA streamline if you’ve paid your current FHA loan on time the past 12 months.

How an FHA appraisal works

To get an FHA loan, homebuyers must choose an FHA-approved lender. As part of the FHA loan application process, the mortgage lender will order a home appraisal from an FHA-approved professional appraiser.

The hired appraiser thoroughly inspects the property inside and out, gathering information about similar sales near the home being financed. The report includes photos of the home and an estimate of the home’s value. It must state whether the home meets the Property Acceptability Criteria, including Minimum Property Standards set by the U.S. Department of Housing and Urban Development (HUD). If the property doesn’t meet the criteria, the appraiser will suggest repairs that improve the property to FHA standards.

Both you and the lender receive a copy of the FHA appraisal. The report is valid for 120 days but may be eligible for a 30-day extension. You’ll need a new FHA appraisal if your loan hasn’t closed by the time of the report. It’s up to the lender to approve, conditionally approve or reject the property. A conditional approval requires repairs to be made.

FHA appraisal vs. home inspection

FHA borrowers may be under the impression they don’t need a home inspection because an FHA appraiser conducts a basic inspection in the course of completing an FHA appraisal report. However, a home appraisal and home inspection provide very different information.

An FHA appraisal is meant to estimate the value of a home while confirming the home meets basic FHA appraisal guidelines. A home inspection gives you a deep dive into all of the components of a home from roof to foundation, but doesn’t provide you with an estimate of the home’s value.

How much does an FHA appraisal cost?

FHA appraisals usually cost between $400 and $700 according to data from fixr.com, and the price varies based on the size, property type, location and features. That’s slightly more expensive than the $300 to $500 it typically costs for a conventional home appraisal.

FHA appraisal requirements

There are two parts to an FHA appraisal: market research and the inspection. The lender reviews both sections to make sure the home’s value is high enough to approve your mortgage, and that it meets all the FHA guidelines for safety and livability.

Market research portion of an FHA appraisal

In the market research, an appraiser determines the stability of home prices in the area. They must cite several things including:

• Two comparable sales closed within 90 days of the appraisal.
• Three recently closed sales within the property subdivision
• Two active listings or pending sales

FHA appraisal checklist

In the inspection, an FHA appraiser will search for things that affect the health and safety of the occupants. These things also contribute to the remaining life and marketability of the home.

• The physical structure of the building
  • No damage to the home’s exterior, foundation and roof
  • No sign of insect infestation
  • No loose wiring or exposed electrical systems
  • Adequate ventilation of attics and crawl spaces
• The livability of the building
  • Working utilities, including electricity, heat and clean water
  • Safe and sanitary sewage disposal
  • No lead paint
  • All fire codes and applicable safety codes are met
• The property site
  • No soil contaminants or underground storage tanks
  • Topography drains water away from the building walls
  • Safe and reasonable property access

What types of homes can FHA approve?

The FHA will insure the following types of homes with an acceptable FHA appraisal:

• One- to four-unit homes
• Manufactured homes permanently affixed to land
• FHA-approved condominium units
• Cooperative units

What to do when your FHA appraisal is complete

When your appraisal comes back, you’ll want to review two things.

The home’s estimated value. If you’re buying a house, the appraised value tells you whether or not the value matches the purchase price you agreed to. If it doesn’t, you can negotiate with the seller to lower the price, or cancel the contract.

The property condition status. The appraiser will assess the value based on an “as-is” or “subject-to” status.

• As-is value. This means no repairs or inspections are required.
• Subject to repairs or alterations. The repairs must be completed for you to complete your loan.
• Subject to required inspections. The appraiser may require a qualified inspection if they observe safety, soundness or security issues they don’t have the expertise to make suggestions on.

How the FHA amendatory clause works

The FHA amendatory clause is a legal document that must be signed when you’re making an offer to buy a home with an FHA loan. It’s your “get out of your purchase contract free” card if the appraised value doesn’t match the purchase price. That means the seller must return any upfront earnest money you paid when you offered to buy the home.