A home appraisal evaluates the value of real estate and is performed bya certified professional known as an appraiser. Appraisers are typically licensed by a regulatory authority that governs the region in which the appraiser works.
Appraisals are assessments commonly used to calculate the value—including the potential sales price—of a given piece of property (along with any buildings on it). The inspection protects the interest of both the homebuyer and the mortgage provider.
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There are different home appraisals depending on the sort of financing needed for the home. Let’s further explore the difference between conventional and FHA appraisals.
Conventional mortgage appraisals
Conventional loans, which are loans without government support such as FHA mortgage loans, typically adhere to standards established by Fannie Mae and Freddie Mac (enterprises created by Congress to provide liquidity, stability and affordability to the mortgage market).
Three key elements—location, condition and comparable values of similar homes nearby—form the foundation on which appraisers base their estimate of a home’s value for a conventional loan.
Additionally, appraisers search for hazards or health-related concerns in the house that might make it less desirable or even unsafe,thus lowering its value.
Before putting any property on the market, a seller can increase the appraised worth of a home by getting a home inspection, thereby determining that systems like the air conditioner, furnace and water heater are in good operating order.
Buyers must remember that home inspections (including termite inspections) are not substitutes for an appraisal (as part of obtaining a conventional loan). The property is not obligated to fulfill certain requirements as long as the selling price and requested loan amount are within the valuation amount.
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What is the goal of a conventional appraisal?
A conventional loan appraisal aims to estimate a home’s genuine value by focusing primarily on location, condition and comparable properties in the region.
Conventional appraisers also search for health and safety issues that can reduce the home’s value but are not required to adhere to specific regulations.
The amount that a lender will lend in a conventional loan is determined by the property’s loan-to-value ratio (LTV). Mortgage lenders are usually only willing to lend a given percentage of the evaluated worth.
Assume your seller has consented to sign a contract in which you will receive a mortgage for 80% of the purchase price. If the lender will lend up to 80% LTV and the contract price is $120,000, the lender will only lend you $100,000.
FHA mortgage appraisals
Since FHA loans are backed by the Federal Housing Administration (an agency of the U.S. government), their appraisals must meet more guidelines than simply determining the property’s market value. The property is compelled to satisfy these supplementary requirements in order to qualify for financing.
In addition to establishing value, FHA appraisers must confirm that the house complies with minimum requirements for health and safety formulated by the U.S. Department of Housing and Urban Development (HUD).
A HUD-approved appraiser visits the property and does a thorough assessment. They give a report to the lender outlining their findings along with an estimated property value.
While the FHA sets appraisal guidelines to protect their investment, the basic concept is that everything in the home functions as intended. For example, a door that is not working should berepaired, as well as broken furnaces or other utilities (such as plumbing), peeling paint in older homes, deteriorated stair railings and even installation or replacement of smoke and carbon monoxide alarms.
An FHA loan might not be the best option if you’re looking to purchase a fixer-upper.
What an FHA appraiser looks for during an inspection
If the appraiser finds some malfunctioning features, those features will be noted. Overall, FHA appraisals are meant to find out if everything is working as it should, if there are any safety or health concerns and if there are conditions which could affect the home’s marketability.
To clarify the minimal property requirements employed by the FHA, HUD created the Single Family Housing Policy Handbook.
These specifications are based on how sturdy the structure is and its safety for the homeowner.
For example, an FHA appraiser will look for the following:
- Functionality of utility systems (water, sewer, electricity, gas) and appliances
- Proper drainage around the perimeter of the home
- Adequate water pressure and both hot and cold water
- Water heater in working order and up to local code
- Attic with undamaged vents, no exposed or frayed wires, no sunlight beaming through cracks or holes
- Crawl spaces with no signs of standing water or problems related to the home’s foundation
- No chipping, peeling or flaking paint on homes built before 1978 (because of the danger of lead-based paint)
- No defective paint or bare wood for homes built after 1978
- Electrical outlets must be in working condition with cover plates
- Active termite infections addressed and cured
- Windows open and close with no broken panes
- No dangling wires from missing fixtures
- Smoke and carbon monoxide detectors present and up to local code
- The firewall from the garage to the home intact
- The roof leak-free with at least two years of life left
- No roofs with more than three layers of shingles
It’s impossible to present an exhaustive list of all variables that could lead to the FHA rejecting the loan. The first thing to remember is that if anything could make the house unsafe,the appraisal may fall short.
If you’re a seller concerned that an FHA appraisal would cause a sale to fall through, speak with your agent. You should also conduct a preliminary investigation into any recognized faults with your home.
Examine the inspection report you received as a buyer and see what it contains, then contact some contractors for prices on some of the more serious faults that may be present.
How are appraisals different from inspections?
The basic distinction between an appraisal and an inspection is that the appraisal considers a home’s value, focusing on a property’s fair market worth. An appraisal can cost around $400, but this figure is can vary depending on the location and size of the home.
On the other hand, an inspection takes a closer look at the condition of the house, apart from its value. Typically, a certified home inspector will spend hours thoroughly examining the home’s overall integrity.
This inspection will comprise both physical examination and checking of the functionality of key systems. Following the inspection, the inspector will suggest to the buyer any repairs or replacements that need to be made to the home before closing. The price of a home inspection can range from $250 to $700.
Are appraisals always required?
A mortgage transaction almost always involves the need for an appraisal. Lenders use information gained from the appraisal to determine whether the property is worth the amount for which the buyer is asking.
However, if a buyer opts for a cash transaction, an appraisal might not be necessary. In those circumstances, appraisal waivers are occasionally approved.
What if the appraisal is too low?
An appraisal gap occurs when the property appraises for less than the selling price.
What if the appraisal is low as a seller? In that case, your options are to dispute it, ask for a second appraisal if you believe the previous one had errors or sell the home for less money.
As a buyer, if the appraisal is lower, you can renegotiate the purchase price. The worst case is that the buyer pays the difference themselves or backs out of the dealaltogether.
Both buyers and sellers want the home sale to go through, so it’s also possible that the two parties can negotiate how to handle the gap.
Compass Mortgage provides answers to all your mortgage questions
Do you have more questions about the difference between conventional and FHA appraisals?
Contact Compass Mortgage today with all your mortgage questions. We’re ready to guide you as you make one of the biggest purchases you will ever make.
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