In all cases in which a mortgage loan is used to purchase a home, your lender will require an appraisal of the home. Appraisals are used by lenders to determine a property’s value to protect their and their homebuyer’s investment. Home appraisals come in different varieties based on the type of financing used for the home, including conventional mortgage loan appraisals and Federal Housing Administration (FHA) appraisals.
Conventional Mortgage Appraisals
Mortgage loans issued by private lenders like banks and credit unions are called “conventional loans”. The appraisals used for conventional mortgages are typically focused on the value of the home and property being appraised. Conventional mortgage appraisals use one of three valuation methods to determine a point of value.
FHA Mortgage Appraisals
Because the FHA insures their mortgage on behalf of eligible borrowers, the FHA requires their home appraisal address certain factors of the home before granting financing. 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 to. For example, a door that is meant to lock should lock. FHA appraisals aim to ensure the home the FHA is insuring is safe and secure for its occupants.
What an FHA Appraiser Looks for During an Inspection
Certain things will be called out in an FHA appraisal, but due to the unique characteristics of each home, certain items may be subjective to the appraiser’s opinion. Overall, FHA appraisals are meant to determine if everything is working as it should, if there are any issues that present a safety or health concern, and if there are any issues that would affect the marketability of the home. Here is a general list* of what an FHA appraiser must inspect during the appraisal of the home:
- Utilities must be turned on to test the systems and appliances for functionality
- Proper drainage around the perimeter of the home
- Adequate water pressure and testing of both hot and cold water
- Water heater must be in working order and up to local code
- Attic must have vents, no damage, no exposed or frayed wires, or sunlight beaming through
- Crawlspaces must have no signs of standing water or foundation issues
- No chipping, peeling or flaking paint on homes built before 1978 for 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 must be addressed and cured
- Windows must open and close with no broken panes
- No dangling wires from missing fixtures
- Smoke and carbon monoxide detectors must be present and up to local code
- Firewall from the garage to the home should be intact
- Roof should not be leaking and must have at least two years of economic life left. The FHA will not accept roofs with over three layers of existing roofing.
FHA standards are rather black and white but there may be instances when the appraiser must use their best judgment in how the spirit of FHA might apply. A home will be rejected if the site is subject to hazards, environmental contaminants, or excessive noxious odors or noises affecting the safety and livability of the property.
Any conditions that the appraisal deems unfit for FHA financing must be repaired prior to closing.
For more information about differences in loan types and other topics related to home buying and financing, download our free Mortgage 101 Handbook.
*This is a general list and does not include all aspects of the home and property an appraiser must inspect.