FHA Appraisal Requirements for 2014: What Does the Appraiser Look for in a Home?

The article provides an overview of FHA home appraisal requirements in 2014. It explains what the appraiser will look for during his visit, general reporting requirements, and other aspects of the FHA appraisal process. This article is intended for home buyers and mortgage shoppers who are considering a government-backed home loan.

Reference: The information below is based on HUD Handbook 4150.2, "Valuation Analysis for Single Family One- to Four-Unit Dwellings." You can find this handbook online with a quick Google search. You can also download it in PDF format from our website.

Introduction and Terminology

When you buy a house using an FHA-insured mortgage loan, the property must first be appraised to determine its value and condition. The appraisal must be conducted by a licensed home appraiser who has been approved by the Department of Housing and Urban Development (HUD), the federal department that manages this particular loan program.

The FHA appraisal process involves a detailed review of the home in order to determine its current market value and overall condition. HUD has specific guidelines and requirements for FHA home appraisals in 2014. They can be found in the handbook mentioned above. You'll find an overview of HUD's guidelines below. But before we get to that, some definitions are in order:

FHA loan: This type of mortgage loan is insured by the federal government, specifically by the Federal Housing Administration. They are generated in the private sector like any other type of mortgage product, but they are insured by the government. This insurance protects the lender against losses that may result from borrower default. This program is open to all borrowers who meet the basic eligibility requirements, but it is especially popular among first-time home buyers due to the low down-payment option.

Appraisal: A home appraisal is a professional appraiser's estimate of the current market value of a property. Appraisers consider local market conditions as well as the characteristics of the property in question. Mortgage lenders typically require home appraisals for both FHA and conventional loans.

Overview of FHA Appraisal Requirements in 2014

FHA appraisals are a source of confusion for many home buyers. That's because it is basically a property appraisal and a home inspection rolled into one. Here's how this process differs from a conventional lending scenario:

When a conventional or "regular" mortgage loan is used to buy a house, the lender will require a home appraisal to determine the value of the property. In this scenario, the appraiser's sole objective is to determine the market value of the house that is being purchased. He is only concerned with the condition of the home as it relates to the market value. It's all about the value!
When an FHA loan is used by a home, the appraiser must perform double duty. He must determine the market value and resale potential (as in the conventional loan scenario above). But he must also ensure that the home meets HUD's minimum guidelines for safety and habitability. This is what makes the FHA appraisal process unique, when compared to a conventional loan scenario.

If you use an FHA loan to purchase a house, you will have to sign a standard disclosure form regarding home inspections. This disclosure is required by the Department of Housing and Urban Development and should be provided to you by your mortgage lender. This document does a good job of explaining the difference between an appraisal and inspection, where FHA is concerned. Here's what it says:

"Appraisals are for lenders; home inspections are for buyers. The lender does an appraisal for three reasons: (1) to estimate the value of a house, (2) to make sure that the house meets FHA minimum property standards, and (3) to make sure that the house is marketable..."

To summarize what we have covered so far:

HUD does not require FHA borrowers to have a home inspection. But they strongly encourage it. Note the difference between requiring and encouraging.
HUD does require an appraisal for all properties purchased with an FHA-insured mortgage loan. This requirement applies to all home buyers who use the program.
The appraiser's primary objective is to determine the value of the property in the current market, for mortgage-lending purposes. His secondary objective is to ensure that the home meets HUD's minimum property requirements for health, safety and habitability.
As a home buyer, you would be wise to have a separate and more complete inspection of the property, prior to closing and taking ownership of the house.

What Does the Appraiser Look for During His Visit?

So, what does the FHA home appraiser look for during the appraisal process? Here is an overview of the key checkpoints and appraisal requirements for 2014, based on HUD Handbook 4150.2:

HUD requires appraisers to make a "complete visual inspection" of the property. This includes both the interior and exterior, the roof, the basement, basement and/ or crawlspace, etc. Primarily, they are looking for health and safety issues. The appraiser wants to make sure the home is livable with no hazards, or potential hazards, to the homeowner.
The FHA appraiser must take photos of the home's exterior. This includes all sides of the house, including front and back, along with any "value adding" improvements or additions such as a pool, deck, or patio space.
The appraiser must also take photos of comparable sales or "comps." These are similar homes that have sold recently, in the same area as the property that is being purchased. These photographs, and the photos of the home being purchased, must be included with the final appraisal / valuation report and sent to the lender.
If the home was constructed before 1978, it may contain lead-based paint that could be a potential health hazard. In such cases, the appraiser must look for peeling or flaking paint on any of the walls, inside or out. This kind of discrepancy typically has to be repaired before the loan can move forward.
If the home is in an area that is known for termite activity, or if the appraiser spots evidence of a termite infestation during his visit, he must require a separate termite inspection.
The roof should be in a good state of repair and "must prevent moisture from entering and must provide reasonable future utility, durability and economy of maintenance."
During the FHA appraisal process, the inspector must check for a variety of safety items including handrails on all stairways, proper ventilation of attics and crawlspaces, etc.

If a house raises a "red flag" in one or more of these areas, it's not necessarily a deal breaker. Many discrepancies can be repaired before the final closing. If the appraiser makes a follow-up visit and finds that all of the noted discrepancies have been fixed, the loan can move forward.

Note: This list is not exhaustive. It is a basic overview. For more detailed information on FHA appraisal requirements in 2014, please refer to the "Property Analysis" section of HUD Handbook 4150.2.

Bottom line: When inspecting the home, the FHA appraiser's primary concern is the health and safety of the borrower. He must ensure that the home is livable and presents no obvious danger or hazard to the homeowner. That is the primary goal during the inspection part of his visit.

Get the full details
You'll find the official list of appraiser checkpoints in this document:
HUD Handbook 4150.2 (PDF)

How Long Does the Process Take?

Here's another frequently asked question among home buyers using this program. How long does the FHA appraisal process take? The process itself is fairly straightforward. The appraiser will visit the property to view it in person, which should only take one day. He will also evaluate recent sales in the area, which can also be done in a day. He may visit some of the comparable homes for sale in the area, or ones that have sold recently. This can be done the same day as his visit to the target house.

Based on all of this research, he will issue an appraised value for the house. He will also prepare an appraisal report, which might take one day or several days, depending on workload. This report will be sent to the lender for review.

Home Buyers Should Also Have a Complete Home Inspection

When the FHA-approved appraiser inspects the property, he is trying to make sure it meets HUD's minimum guidelines for health and safety. He will also determine the current market value of the property, for mortgage-lending purposes. We've covered all of that. But this is not the same as a full home inspection conducted by a professional inspector.

A "regular" home inspector will conduct a much more thorough inspection of the property, from top to bottom, inside and out. He is looking out for you, the buyer. He will give you a detailed report of all discrepancies found, as well as the corrective action needed to fix them. I highly recommend that you get a full inspection when buying a house. It is well worth the cost (generally $350 - $500) because it gives you the peace of mind that comes from knowing what you are buying.

To learn more about FHA appraisal guidelines in 2014, refer to HUD Handbook 4150.2, "Valuation Analysis for Single Family One- to Four-Unit Dwellings."