What’s the Difference Between an FHA and a Conventional Appraisal?

Home appraisals are an important part of the buying process.

In nearly all instances where a mortgage loan is used to purchase a home, any lender will require an appraisal to determine a property’s value.

What's in this article?

What is a home appraisal?
Conventional mortgage appraisals
FHA home appraisals
What an FHA appraiser looks for during an inspection
Whats the difference between an appraisal and home inspection?
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Home appraisal requirements are based on the type of financing used for the home, including the two most common loan types: conventional mortgage loan appraisals and Federal Housing Administration (FHA) appraisals.

Let’s take a look at the difference between FHA and conventional appraisals, including the requirements of each.

What is a home appraisal?

Appraisals are a critical component of the mortgage process. 

During a home appraisal, a licensed real estate appraiser determines the fair market value of a home based on factors such as the general condition of the property, renovations or upgrades and nearby home values.

Appraisals offer protection to both lenders and buyers to protect their investment in the property.

Generally, if an appraiser determines that the market value of a property is the same or more than the sale price, a home purchase deal can move forward.

If it comes back with a lower market value, further negotiations between the buyer and seller will need to take place.

FHA and conventional loans have different appraisal requirements because FHA loans must meet the minimum standards set by the U.S. Department of Housing and Urban Development (HUD).

The main difference between an FHA and a conventional appraisal is the focus of the appraisal.

Conventional appraisals are mainly focused on the value and condition of the property, while FHA appraisals place special emphasis on the safety and security of the property.

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Conventional mortgage appraisals

Conventional loans are the most common type of mortgage loans issued by private lenders such as banks and credit unions. 

Conventional loans, also known as conforming loans, need to conform to Fannie Mae or Freddie Mac guidelines. Unlike FHA loans, however, they are not backed by the government.

The appraiser will check for the following:

  • Overall condition of the home and appliances, checking specifically for damage
  • Size of home, including number of rooms
  • Condition of roofing, foundation and landscaping
  • Quality of lighting and plumbing
  • Remodeling or upgrades
  • Condition of basement and attic

Conventional mortgage appraisals use one of three metrics to determine a point of value: the income method, the comparable sales method or the cost method.

Analyzing comparable sales is the most common. With this approach, the appraiser must calculate the value of the property by checking out recent sales in the area that have the most similar characteristics.

FHA home appraisals

Because the FHA insures their mortgages on behalf of eligible borrowers, the FHA requires that home appraisals address certain factors of the home before granting a mortgage loan. 

While the FHA orders an appraisal to protect their investment, the basic concept of FHA appraisals is that everything in the home functions as it was intended. For example, a door that is meant to lock should lock. 

An FHA appraisal aims to ensure that the home is safe and secure for its occupants.

What an FHA appraiser looks for during an inspection

Specific, factual details will be highlighted in every FHA appraisal. Beside those objective considerations, some more subjective observations may vary due to each home’s unique characteristics.

Overall, however, FHA appraisals are meant to determine if everything is working as it should, if there are any defects that present a safety or health concern and if there are any conditions that would affect the marketability of the home. 

Here is a general breakdown of what an FHA appraiser must inspect during the appraisal of the home.

Building structure and condition

  • No damage to siding, foundation or roof
  • No insect or rodent infestations
  • No loose or exposed wiring
  • No lack of ventilation in crawl spaces and attics

Building livability

  • Fully-functional utilities, including heat, electricity and water
  • Fully lead-free paint throughout the house
  • Fully-operational sanitation system
  • Full compliance with all fire and safety codes

Property condition

  • No soil contaminants
  • Sufficient drainage away from building
  • Hazard-free access to property

The appraiser must also perform market research to determine other home prices in the area.

FHA standards are straightforward, but there may be instances when the appraiser must use their best judgment in how the spirit of FHA regulations might apply. 

A home will be rejected if the site is subject to hazards, environmental contaminants or excessive noxious odors, even noises which affect the safety and livability of the property.

Any conditions that the appraisal deems unfit for FHA financing must be repaired prior to closing.

Whats the difference between an appraisal and home inspection?

The home appraisal process may seem similar to an inspection, but appraisals and inspections serve different purposes.

An appraiser is concerned with the value of a property, while an inspector is concerned with the condition of the home and what must be repaired or replaced before closing.

Mortgage lenders almost always require an appraisal, but home inspections aren’t always required.

However, both processes may result in the need for negotiations with the seller.

Get preapproved for a loan today with Compass Mortgage

Now that you know the difference between an FHA and conventional appraisal, it’s time to connect with us at Compass Mortgage. Get preapproved to see which loan type best fits your unique life goals.

Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.

The mortgage lending professionals at Compass Mortgage are ready to support you with our simple, personalized loan process.

We promise to be your advocate and partner through every step, to find the most affordable loan for you.

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Photo by Curtis Adams