Of the FHA guidelines that must be satisfied to get approved for a mortgage, FHA lenders will require that your property meet specific appraisal standards. An appraisal helps a lender calculate a loan-to-value ratio for a home loan and it helps protect you from the market. When a FHA approved broker works to analyze how much the home is worth, they are working to make sure that you don’t end up paying more than the home is worth in terms of its fair market value.
A Lender Will Approve a Mortgage That Covers 98.15% of the Appraisal Value
Ultimately, the lender will approve a home loan amount that is based on the lower of either the appraised value of the property or the asking sales price. According to FHA loan guidelines, a borrower is able to get approved for a mortgage that is up to 98.15% of a property’s appraisal value. Everything that goes into this process, along with the greater approval process, has to do with mitigating risk. As a lender, there is risk that they may not be paid back the money that is loaned to you.
Home Appraisals Mitigate Risk For the Lender
When the FHA mortgage expert appraises a home, they gain an understanding for what that is worth as collateral should you ever stop making mortgage payments. Obviously if your fail to pay your mortgage, the bank can then come and take possession of the home as a way of getting their money back. When a bank takes possession of a home for reasons due to non-payment, the foreclosure process begins. At this point, the FHA lender (a bank) takes possession of the home and works to sell it to another buyer who is better able to handle the financial commitment.
As a borrower, this appraisal process helps ensure that you are not going to be overpaying for a property that is just not worth the money.
Only FHA Licensed Appraisers Qualify
To be in compliance and prevent any delays, it is important to only work with a FHA approved, licensed appraiser. Only a FHA appraiser can work to appraise the value of your hopeful new home. FHA appraisers are aware of the specific guidelines and requirements that must be met in order to stay in compliance with FHA rules. As a buyer, you should expect that the appraiser will work to qualify whether or not specific property standards are met… Homes that are purchased with FHA loans must not present any sort of safety concern and should be livable immediately after the transaction closes. An inspection will help to ensure this.
To check out what the FHA Appraisal sheet looks like, click here for a PDF of the actual form that is used in this process: Click Here
The FHA Appraisal Process Is Very Basic
First, the home appraisal is kick-off when the mortgage lender orders it at the request of the buyer. This allows an appraiser to begin work on your file and ultimately make certain that the home meets the bare minimum requirements established by HUD.
When your lender and the appraiser are working to analyze the value of the home you hope to purchase, a glance at the most recent transactions within and around the neighborhood will take place. Most often, you can expect that an appraiser will want to dig in to any sales that have occurred within a mile radius. In some cases, several recent, comparable transactions (within a 12 month history) will be analyzed to come up with the final appraisal value.
So if the home you’re looking at has 3 bedroom, 2 baths, and a 2 car garage… well, expect the appraiser to analyze any sales of other homes that have similar attributes as yours. Other factors like total square footage, schools, and other things will play into what the final dollar amount is.
What Do FHA Appraisers Look For?
As the appraiser works to understand your market and get a grasp of how things have changed over recent history, the following will be completed as part of the process:
- Inspection of the home interior
- Inspection of the home exterior including landscaping
- Analysis of the structural integrity of the property
- Analysis of any upgrades that may increase value
- Verification that no lead-based paint or asbestos is present
- Verification that fixtures work as expected
- Verification that any plumbing and appliances are functional
- Evaluation and photographs of the lot’s condition
- Review of a map showing recent and comparable home transactions
So Who Pays for the Home Appraisal?
Ultimately, it is up to the buyer to handle the costs associated with the FHA appraisal. This is something that is paid upfront and before you close on the property. Expect to pay anywhere from $300 to $500 for this part of the process.
Things that affect the final cost of your appraisal may include:
- Size of the home — its total square footage
- Size of the land — a lot of land requires more leg work (literally)
- Location — is the home hard to get to or is it convenient to access?
- Your Appraisers Rate — this is determined by the person/company you go with
While the FHA appraisal process is typical and pretty basic, this is one part of the mortgage approval process that may result in delays. Make sure you’re prepared and set yourself up for a smooth mortgage approval process by learning about some of the possible delays (and how to avoid them!).