October 24, 2016
FHA home loans require an appraisal, which is designed to determine the fair market value of the home, but also to insure the property meets FHA minimum standards. While the appraisal must not be considered an inspection (and passing the appraisal is not a stamp of FHA approval or a guarantee that a home is free of problems), the FHA appraiser is required to report problem conditions may be spotted during the process.
What does this mean?
HUD 4000.1 states, “The Appraiser must report known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the ability of the property to serve as collateral, and the structural soundness of the improvements.” This is found on page 491, which also adds the following description/definition of hazards:
“Environmental and safety hazards may include defective lead-based paint, mold, toxic chemicals, radioactive materials, other pollution, hazardous activities, and potential damage to the Structure from soil or other differential ground movements, subsidence, flood, and other hazards.”
Some types of hazards or hazardous conditions are specifically addressed in this section of FHA loan appraisal rules. Consider, for example, what the FHA says about lead paint:
“The Appraiser must note the condition and location of all defective paint and require repair in compliance with 24 CFR 200.810(c) and any applicable EPA requirements. The Appraiser must observe all interior and exterior surfaces, including common areas, stairs, deck, porch, railings, windows and doors, for defective paint (cracking, scaling, chipping, peeling, or loose). Exterior surfaces include those surfaces on fences, detached garages, storage sheds, and other outbuildings and appurtenant Structures.”
That guidance pertains to “improvements” on or before 1978, when lead paint was commonly used. Here’s another section of the FHA loan rules in this area, addressing condos built on or before 1978:
“The Appraiser must observe the interior of the unit, common unit and exterior surfaces and appurtenant Structures of the specific unit being appraised; and address the overall condition, maintenance and appearance of the Condominium Project. The Appraiser must note the condition and location of all defective paint in the unit, common area and exterior, and require repair in compliance with 24 CFR 200.810(c) and any applicable EPA requirements.”
FHA loan rules require the appraiser to note these conditions where they are observed. But it’s crucial to understand that the FHA loan rule book states that the appraiser must report all KNOWN hazards or issues. If the appraiser doesn’t spot an issue for some reason, it will not get reported.
That is why it’s so important for an FHA borrower to pay for the optional home inspection, which is a much more in-depth examination of the property than the appraisal process. This is key for new purchases. Your appraisal fee is an expense that is required as part of the FHA loan process, but the inspection is an expense that is, while optional, vital to making an informed purchase.
Reverse mortgages obviously have a different set of concerns. The FHA appraisal process in this case has more to do with determining the market value of the home and the minimum property standards as they pertain to the amount to be borrowed and the future marketability of the property. In the case of reverse mortgages, the borrower is already very familiar with the property and doesn’t require a home inspection. The appraisal requirements are the same, however, the FHA appraiser must report any known issues as detected during the appraisal process.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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