FHA loans are designed to make homeownership accessible to deserving homebuyers.
The government created this program for those who wanted to become homeowners but didn’t have sparkling credit and a 20% down payment. (FHA loans require a minimum 580 credit score with a 3.5% down payment.)
But FHA loans come with certain rules — and among the most important are the FHA appraisal requirements.
An FHA-approved appraiser ensures that the home meets the government’s safety and livability standards. The rules aren’t onerous, but are a bit more strict than those that apply to some other loan types.
FHA appraisal requirements can seem a little intimidating since they’re key to getting your FHA mortgage. But we’ll break down what a house needs to meet the federal appraisal guidelines and what your appraiser will look for — and that may help you in your home search.
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What is an FHA appraisal?
An FHA appraisal assesses your prospective home’s basic systems and structure, as well as the fair market value of the property.
Only appraisers approved by the Federal Housing Administration (FHA) can conduct appraisals for FHA loans. The FHA, which is overseen by the U.S. Department of Housing and Urban Development (HUD), sets property requirements to ensure that borrowers are moving into homes that are safe and livable.
The appraiser will look over the main systems and overall condition of the home to verify that it meets these minimum property requirements.
They’ll also analyze the home’s value. The FHA doesn’t lend money directly, but it insures FHA loans offered by private lenders. As such, it wants to make sure you’re not borrowing more money than the home is worth. That’s in the government’s and lender’s best interest, and in yours.
Paying significantly more for a house than it’s worth means you could lose money down the road. If you want to sell the property, you may not be able to get enough in the sale to pay off your loan.
And in the unfortunate event that the mortgage lender needs to foreclose on the home, they — and the FHA — want to know they can recover their investment with the sale of the home.
What’s the difference between an FHA appraisal and an inspection?
An FHA appraisal is not the same as a home inspection. Lenders, and the FHA, require a home appraisal but they do not require a home inspection.
However, you will want to schedule a home inspection before deciding to buy the home.
The appraisal ensures a home meets HUD’s minimum property standards and determines the market value of the home. An inspection offers a deeper dive into the home’s systems, structure, and other features. The inspector can also point out signs of a pest infection or costly deterioration in your windows, walls, and other areas of the home.
Inspections are technically optional, but getting one is always a good idea as a buyer. An inspector will provide you with a detailed report of the home’s condition and is for your benefit. That report will help you be more informed about the home you’re buying. But it can also give you negotiating power. If the home inspector finds problems with the home, you can ask the seller to repair them before closing or lower the sale price accordingly.
The best way to distinguish appraisals from inspections is this:
The appraisal is for the lender’s benefit. The appraiser focuses on the home’s value and overall safety and livability.
The inspection is for you. Your inspector will do a deep dive into the home, its structure, and even details about air quality, pests, lead paint and other potential chemical hazards.
How does the FHA appraisal process work?
When you make an offer on a house and the seller accepts it, you “go under contract.” This means you’ve made a tentative commitment to buy the home, and the seller is legally obligated to stop showing the home to other buyers.
This is also when your full FHA loan application process begins, and an appraisal is part of that.
Fortunately, you are not responsible for finding an appraiser yourself. Your lender will order the appraisal from an FHA-approved professional appraiser. The appraiser’s walk-through typically takes a few hours, though the official report isn’t issued for a few days (or even weeks).
When the appraisal report comes back, it will indicate whether there are any property issues that must be fixed before closing. It will also include the market value of the home. FHA lenders cannot approve a loan for more than the appraised valuation, so if the appraisal comes in low, you will need to pay the difference in cash or negotiate a lower purchase price with the seller.
Typically, an appraisal costs around $500, though that number can vary based on where you live, the size of the home, and other factors. The borrower pays for the appraisal as part of their closing costs.
What’s on the FHA appraisal checklist?
FHA appraisers must ensure a property meets the long list of requirements set out by HUD, which are spelled out in the FHA policy handbook. You could look them up yourself, but fair warning — that list is really long.
So we’ve highlighted some of the biggest items your FHA appraiser will be on the lookout for:
- The home is free of known health and safety hazards, like lead-based paint*
- Sufficient water flow and access to hot water
- Sanitary sewage disposal, and the septic system (if there is one) is functional
- Home is free of termites and wood-destroying insects
- Property is accessible from a public or private street
- Adequate ventilation in the attic and crawl space
- Foundation is in good condition
- Water drains away from the home’s perimeter properly
- Safe and functional heating source
- Chipping or peeling paint if the home was built before 1978
- Missing or broken handrails on staircases with more than three steps
- Standing water or signs of mold and mildew
- Missing fixtures or cabinets in the bathrooms and kitchen
There are many more elements the appraiser will note. But the main goal is to evaluate whether the home is in good condition and if it’s safe and livable for the borrower.
Although the FHA minimum property requirements are strict, they’re not prohibitive. In fact, most homes will pass an FHA appraisal, so don’t let these requirements scare you off FHA loans.
*Many homes in the U.S. have lead-based paint in them, so the presence of lead-based paint is not a deal-killer for appraisers. However, sellers must provide information in writing to the buyers about lead paint and the potential health hazards associated with it.
Your appraiser or inspector may also note the existence, or potential existence, of lead paint in the home. There are ways to remove lead paint or cover it up safely, though the cost and labor for this will likely fall on you once you take ownership of the home.
The appraiser marked something “further repair.” What now?
If an FHA appraiser finds an item that does not meet FHA appraisal standards or is a health or safety hazard, they’ll mark it as “further repair” or “as-repaired.” These terms simply mean the issue will need to be fixed before the lender can issue an FHA loan on the property.
Say the home you’re purchasing has a septic system that’s currently non-functional. The appraiser might mark this as “further repair” when issuing their report. Once the seller fixes the system, the appraiser would come back to confirm that the work is done. If the system is up-and-running, your loan can move forward as planned.
As a general rule, required repairs are an opportunity for negotiation. Anything the appraiser flags will need to be fixed before closing. But there may be other issues you’re willing to handle yourself. The seller may be willing to lower the purchase price and make the needed repairs to get the sale across the finish line.
That’s in a standard market, though, and today’s homebuying market is anything but. With demand for houses at an all-time high, sellers often have multiple offers on their homes, which means there’s less pressure on them to make repairs.
And that brings us to our next point:
Will sellers accept offers with FHA loans?
With housing as hot as it is, sellers often aren’t willing to make repairs — especially large or expensive ones. They, and their real estate agents, may be hesitant to accept an offer with an FHA mortgage for this reason.
If a seller accepts an offer with an FHA loan, and the appraisal comes back low or with costly repair requirements, two things can happen. Either the seller has to put more money into the house — and accept a lower sale price — or the buyer can walk away.
Neither is a good outcome for the seller. In the first scenario, they make less money on the sale. In the second, they’ve missed out on showing the home to other prospective buyers. And the longer the home is on the market, the more it raises questions about the property. When a house is listed again, buyers may assume there’s something wrong with the home and opt not to see it.
Still, using an FHA loan doesn’t mean your offer won’t be accepted.
Remember, most homes will pass an FHA appraisal. But there are a few ways you can make your offer more attractive to sellers:
A preapproval from a reputable lender tells the seller that you have the money to buy the home. Preapprovals are reviewed by an underwriting team that assesses your income, debts, savings, credit score, and other key factors for qualifying for a loan. Getting preapproved can boost sellers’ confidence in your offer.
Offer more earnest money
Earnest money is cash you put down with your offer. Remember how the seller stops showing the house to other buyers once they accept your offer? Earnest money makes that worth their while. They’re taking a risk by going under contract, so putting down a large earnest money deposit shows them you have skin in the game.
Earnest money may be refundable depending on the conditions stated in the purchase contract, and it goes toward your down payment and closing costs if you don’t. So you don’t lose money, but it can go a long way toward showing the seller you’re committed to this purchase
Include a lease-back and allow the seller to stay in the home after closing
While a home can sell quickly in this market, buying one can be more challenging. By offering your seller a lease-back option, in which they can stay in the home and rent it from you for a period of time after closing, you alleviate some of the pressure on them to close the sale, pack up, and find a new place to live in a short amount of time.
Buy the home as-is
In a less competitive market, you can negotiate with sellers to make certain repairs and upgrades before closing. But that’s a tougher conversation to have today. Aside from appraisal-related repairs, you might commit to buying a home as-is.
You don’t want to purchase something that’s unlivable or that needs repairs beyond your budget. But if you’re comfortable buying a house that has solid bones but needs cosmetic upgrades, you can reassure sellers that you won’t ask them for those fixes and are prepared to handle those yourself.
Another option is to try for a low down payment conventional loan. There are many 3% down conventional loans to choose from, and there’s a decent chance you could qualify. Conventional loans come with fewer appraisal and property requirements compared to FHA.
Choosing a home that’s newer or in great condition can also increase your chances. A home that’s relatively new and well-maintained, or an older one that’s been updated and well-cared for over the years — these properties are less likely to have safety and livability issues.
And if they’re in desirable neighborhoods, so much the better, as it’s more likely your appraisal will come in close to your purchase price.
How can I find FHA-approved homes?
There’s no database of FHA-approved homes (though there is one for condominiums). Most homes will meet FHA guidelines, though you won’t know for sure until you’ve gone under contract and receive the appraisal.
But you can make an educated guess. Look over the checklist above before seeing a house. Keep an eye out for things like loose or broken handrails, recent water damage, or smells that could indicate mold and mildew. While you’re there, try flicking on the lights and running the faucets to check the water pressure. What does the paint look like? Is it chipping or flaking off the walls? Or does it look intact?
You can — and should — also talk to your real estate agent about the home. Let them know upfront that you’ll be using an FHA loan to buy the home, and ask for their input on whether a house is likely to meet the government guidelines.
Don’t fret too much, though. Properties such as old workshops or standalone structures that appear hazardous can be red flags, but a generally sound property has a good chance of passing the appraisal.
What if the FHA appraisal comes back lower than the sales price?
Home prices have increased a lot lately, so it’s not out of the realm of possibility that your FHA appraisal will come in low. When this happens, you have a few options.
- Pay the difference out of pocket
- Renegotiate the sale price with the seller
- Ask the seller to split the difference
You can also back out of the deal entirely as long as you have an appraisal contingency in your contract. FHA and VA loan contingencies protect borrowers from being financially penalized for backing out of a sale if the appraisal comes in under the purchase price.
Now, if you have your heart set on a home that you know will not pass an FHA appraisal in its current condition, you can consider an FHA 203k loan.
An FHA 203k loan allows you to finance the home purchase and up to $35,000 in renovations in one mortgage, and it can allow you to purchase a fixer-upper that needs a few upgrades before it’s move-in ready.
FHA appraisal FAQs
An FHA appraiser is looking for functional systems, a sound foundation, and a safe, hazard-free living environment. They will ensure that the home meets HUD’s minimum property standards and will assess its market value. FHA lenders cannot lend more than the home is worth, so if the appraisal comes in below the sale price, you’ll need to negotiate the price with your lender or walk away from the sale.
The FHA has strict requirements for the properties it backs, but most homes pass appraisal just fine. To avoid any problems with your FHA appraisal, focus your home search on newer properties or ones that have been well cared for. Fixer-uppers and distressed homes are more likely to have issues with appraisals.
Anything that’s a health or safety hazard can cause a home to fail its appraisal. Non-functional systems, a deteriorating foundation, or issues with water supply or sewage disposal can also be red flags.
If you’re planning to use an FHA loan to purchase your home, tell your real estate agent and keep the property standards listed above in mind when touring potential houses.
As long as you choose a property that’s in generally good condition, you have a solid chance of passing the appraisal.
**Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.