Once you have qualified for a loan from the Federal Housing Administration, found an approved home to buy and started a sales agreement, it is time to proceed with an FHA appraisal. This process is required not just to establish the market value of the home, but most importantly, to assess its condition and make sure that it will hold that value over the term of the loan. The administration must use the sale of the property to recuperate any losses that may occur due to borrower default. Read on for a breakdown of the process and standards for home approval.
FHA Appraisal Process
In February of 2010, changes were made in regards to ordering the appraisal. To help remove the possibility of a biased or falsified report in favor of the would-be homeowner, appraisal management companies were established to randomly assign agency-approved appraisers to homes. This effectively limits the contact a homeowner may have with them. Certification may be verified on the Federal Housing Administration’s homepage, which has a list of all approved appraisers nationwide.
The agent assigned to your home will then tour the property, keeping their eyes peeled for any signs of serious safety hazards. This is not the same as a home inspection, which may be ordered to further analyze any existing problems. The appraiser’s job is to look for major issues that threaten the value of the home. Examples include leaky roofs, the presence of toxic chemicals, insufficient heating and cooling ventilation, and poor water and sewage drainage. If any of these conditions exist, the appraiser will order that they be fixed before approval and the value of the home will go down.
The agent will then prepare accurate documentation of his visit. Photos of the exterior of the house (front, back and curbside) are included, as well as a sketch of the interior floor plan and a map listing all major appliances and other important items. An estimated “life span” for the home in terms of economics is listed with the home’s assigned federal identification number.
After the walk-through is complete, the appraiser will calculate the market value of your home, employing one of three methods. When using the Cost Approach, he determines how much money it would require to build a property that is comparable in structure and condition. With the Sales Comparison method, he will use the average price of three similar homes that have recently sold in the area, and then adjust the amount based on additional or lacking features. If you are financing the property for rental purposes, the appraiser can use the amount of income it will generate to establish its value.
This FHA appraisal is complete when the agent comes up with the estimated market value of the home, based on all of the information listed above. The lender will most likely use this figure to set a loan limit for the purchase of the home, regardless of the asking price.
Guidelines for Approval
The most important information that an appraiser will use to determine a property’s value is its overall condition. The building must substantiate the loan amount in order to be fair collateral. He will check the following list of requirements during the property tour.
Roofs must have at least two years of life left in them, and if they have reached the maximum of three layers with needed repairs, they must be completely replaced to qualify. Siding and exterior paint must be in good condition. Porches and attached stairs have to be free of damage or they are considered a safety hazard. Basements are checked for signs of water or structural damage, and appliances such as hot water tanks and sump pumps must be functioning and properly wired. Attics are also checked for such damage, and their crawlspaces must be ventilated and accessible.
The appraiser will check to make sure that electrical boxes do not have any frayed or damaged wires, and that all living spaces have adequate heating. Private sewer systems like septic tanks will be approved if they are certified by the local health authority. Wells are fine as long as they are an appropriate distance from any sources of contamination.
Agency guidelines require the agent to carefully consider the environment in and surrounding the home. Were there any outdated, toxic materials used in the manufacture of the home? Any location characteristics that may interfere with the property’s health status or marketability, such as consistent loud noises or foul odors, will be carefully considered as he weighs all these factors and determines an overall market value for the property.
Now you know exactly what an appraiser must accomplish before you can qualify for any federally-backed loan. This is a vitally important step because the FHA appraisal is the government’s way of insuring themselves when they insure your lender. All variables must be carefully considered and numbers crunched to make sure that the property will prove to be a good investment if the lender is forced to foreclose on the loan. The better the resale price, the more funds will be available to pour back into new mortgages for new homeowners!