FHA Appraisal Guidelines for 2021
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Mortgages insured by the Federal Housing Administration (FHA) must meet strict FHA appraisal guidelines. An FHA appraisal, like other home appraisals, is done by a professional property appraiser who estimates how much a home is worth. However, FHA appraisals cost more and have additional steps, including an FHA home inspection.
To qualify for FHA financing and its more lenient borrowing requirements, a property must first pass the FHA appraisal test.
What is an FHA appraisal?
When a prospective homeowner applies for an FHA loan, both the borrower and the property must meet FHA loan requirements. A mortgage lender orders an FHA appraisal during the underwriting process to ensure the property meets specific FHA appraisal guidelines.
The FHA appraisal process differs from that of a conventional mortgage in that it has two objectives: to determine its value and assess the home’s condition. Specifically, an FHA appraisal also evaluates whether the property meets FHA home requirements, known as the Property Acceptability Criteria.
Because of this two-part objective, FHA appraisers perform certain tasks that aren’t typically done in standard home appraisals. For example, during an FHA appraisal, utilities must be on. This allows the appraiser to ensure the water, sewage, electrical and heating systems function properly. Additionally, the appraiser also ensures that all the appliances work. The appraiser will carefully detail and photograph any part of the property that doesn’t meet FHA home requirements.
All homes insured by FHA must undergo an FHA appraisal and FHA inspection, including the following property types:
- Single-family homes
- Multifamily properties up to four units
- Manufactured housing
Vacation homes and commercial properties don’t qualify for FHA financing.
FHA appraisal guidelines
FHA appraisal guidelines revolve around the Property Acceptability Criteria, which include two sets of guidelines: minimum property requirements (for all homes) and minimum property standards (regulatory requirements) for new construction. (Note: New construction includes newly built properties and those less than a year old that have never been occupied.)
To be eligible for an FHA loan, properties must meet these FHA appraisal guidelines set by the U.S. Department of Housing and Urban Development (HUD). They ensure the property is safe, sound, secure and suitable for living.
FHA appraisal checklist
While an FHA-approved appraiser inspects and evaluates the property’s condition, it’s not the same as a standard home inspection. FHA-approved appraisers follow a unique set of criteria to assess if the home meets HUD guidelines. But an FHA appraisal does not guarantee the condition of the property, systems or appliances; that’s where an independent home inspection comes in.
Lenders don’t require FHA borrowers to get a separate home inspection. It’s a good idea to get one, though, to ensure there are no major issues with the home and that you’re making a sound investment decision.
What do FHA-approved appraisers look for?
An FHA appraisal has three components: a site analysis, a property analysis and a property valuation. Here are some things an FHA-approved appraiser considers:
- The property must be a single real estate entity.
- The property must meet all zoning requirements.
- The property must not interfere with or intrude onto another property.
- The house has to be accessible from the front and without going through another living area.
- The foundation has to be in good condition.
- A home’s lot has to lead moisture away from the house.
- Utilities such as water, sewage, heat and electricity have to work.
- Each home has to include a kitchen, bathroom and other living spaces.
- People need to be able to escape from a bedroom in the event of a fire.
- Swimming pools have to be up to code.
- The roof must not require major repairs for at least two years.
- There should be no chipped lead-based paint.
- The property has to be free of hazards, noxious odors and excessive noise.
If the property fails to meet any of these standards, the FHA appraiser will include photos of the area that isn’t up to code. They will also include cost estimates for the required repairs — something most standard home inspections and appraisal won’t include.
FHA appraisal for new construction homes
For new construction homes, the appraisal process differs slightly in how the appraiser estimates the property’s value.
If the house is less than 90% complete, the appraiser has to consider the floor plan and other documents to assess the projected value of the property once construction is done. The lender will still use the appraiser’s report to determine whether the property meets FHA’s guidelines.
If the property is 90% or more finished (with just preference items such as countertop installation remaining), the appraisal report will include tasks to complete after the appraisal.
FHA appraisal for fixer-uppers (FHA 203k mortgages)
Houses purchased with an FHA 203(k) mortgage (rehabilitation loan) are usually in a distressed condition and may need substantial repairs or renovations. But the homes have to comply with the FHA’s property standards once the homeowner completes repairs.
Your lender will order an “as-repaired” appraisal before it underwrites the loan. This appraisal gives the bank the information it needs to ensure the house will qualify for FHA insurance after the renovations are done. The assessment will also include an estimate of the home’s fair market value once all repairs are complete.
In addition to an appraisal, the lender requires a work write-up and cost estimate for repairs on the house. If the purchase price of the home plus the cost estimate for required work exceeds the “as-repaired” estimated value of the property, the FHA loan won’t be approved.
How an FHA appraisal works
While FHA appraisals are more detailed and involved than a typical appraisal, the process is straightforward.
- The mortgage lender orders an appraisal from a roster of FHA-approved appraisers
- The appraiser evaluates the property during an on-site analysis following FHA guidelines
- The appraiser prepares and submits the report to the lender indicating the value of the property and listing any necessary repairs along with estimated costs
If the appraiser cannot confirm the property meets the minimum property requirements or standards during the initial visit, the lender may require an additional inspection.
Once the report is submitted, the lender will review it and, if applicable, may require specific repairs be made. The buyer can take the following next steps:
- Ask the seller to complete the repairs or negotiate who will be responsible for them
- Choose a different form of financing, such as a 203(k) loan or a conventional mortgage
How long does an FHA appraisal take and how long is it valid for?
An FHA appraisal and FHA inspection can take several hours. Because the process is more involved than a standard appraisal inspection, the report may take several days (or longer) to get back.
An FHA appraisal is usually good for 120 days, but you may be able to get a 30-day extension in some cases. After this time period expires, you’ll need a new FHA appraisal if your loan hasn’t closed yet.
What if an FHA appraisal comes in low?
The FHA won’t insure a property if its appraised value is lower than the loan amount. If it looks like the appraiser didn’t consider all the relevant information on the home, a loan underwriter can ask the appraiser to reconsider the value, or even order a second appraisal if the first had clear deficiencies.
A low appraisal doesn’t mean the sale is tanked, however. To overcome this roadblock, you could:
- Put more cash down to make up the difference between the appraisal value and purchase price
- Ask the seller to reduce the purchase price to reflect the value and condition of the property
Work with your lender to consider all your options before canceling your sales contract based on a low appraisal value.
How much does an FHA appraisal cost?
An FHA appraisal can cost between $300 and $700. In general, several factors contribute to the cost of an appraisal, including the location, property type and size of the home. Because an FHA appraisal also involves a detailed FHA inspection, the cost is higher than a standard appraisal.
FHA does not establish appraisal fees. Rather, your lender will negotiate the price with a licensed appraiser. Additionally, if the appraisal report indicates that repairs are needed, you may have to pay for specialty inspections to evaluate the issues.
While it’s not required, FHA borrowers who choose to have an independent home inspection will pay a higher total out-of-pocket cost for the appraisal and inspection than with a conventional mortgage. Here’s a look at how the two loans stack up in appraisal and inspection fees.
|Appraisal and Inspection Costs for FHA Loans vs. Conventional Loans|
|FHA loans||Conventional loans|
|Appraisal costs||$300 to $700||$300 to $400|
|Home inspection costs||$300 to $500||$300 to $500|
FHA borrowers have the option of financing the cost of the appraisal into their loan amount, or having the lender pay for it and other FHA closing costs in exchange for a higher interest rate. Alternatively, the seller can pay up to 6% of an FHA borrower’s closing costs.
Where to find FHA-approved homes, lenders
The FHA doesn’t lend money directly to borrowers. Instead, homebuyers secure their loans through lenders who receive insurance protection from the FHA if you default on your loan. You can search through HUD’s database of FHA-approved lenders by state.
Borrowers planning to purchase a condo can also use HUD’s list of FHA-approved condominium projects. The list doesn’t include units for sale but rather signals the condo development is eligible for FHA financing. Even though a particular condominium project is approved, the individual unit still undergoes the FHA approval process.
Homebuyers are not limited to condos in approved condominium projects, though; the FHA allows single-unit approval of individual units within developments that are not FHA-approved.