November 9, 2018
You may read articles discussing home prices moving lower on real estate blogs or lending websites; when house prices move from one part of a cycle to another there is sometimes confusion related to the valuation of a home.
Why would an FHA borrower looking at a house in a neighborhood or housing market with prices trending in one direction get back an FHA appraisal indicating that the home the buyer wants isn’t valued in the same way? Higher or lower, why does one home get valued “as expected” when another one does not?
There are a set of variables at work in the appraisal process that include not only the age/condition of the home, but also how other houses stack up against the one you want to purchase with an FHA mortgage loan.
FHA Appraisals: It’s Not Just About The Home Being Appraised
Are homes in your housing market overvalued? Undervalued? Or about average? No matter which way the market might be moving at any given moment, the FHA appraisal process includes more consideration than just the house being appraised.
The home is reviewed to insure it meets minimum FHA standards (not “inspected”, as some mistakenly believe) but it is also held up against other properties that may be similar. Your dream home will be examined against these “comparables” to see how the home for sale measures up to similar houses in the area.
If the home you want to buy has more, or better features, that may result in the appraisal coming up with a dollar amount for the fair market value that differs from the less desirable or less elaborate versions of the house found elsewhere on the market.
If the home you want is compared and found lacking beside similar properties, the valuation of the home should reflect that. The comparables that are superior (for any number of reasons) will be more valuable in the marketplace than the less elaborate or well-kept versions of a similar property.
FHA Loan Rules About The Results Of The Appraisal
There are some important things you should know about the appraisal results:
- When your appraisal results are in, the lender is required to use the appraised value of the home or the asking price of the property-whichever is lower-to help establish the FHA mortgage loan amount.
- FHA loan rules state that the borrower cannot be forced to agree to a loan where the appraised value comes in lower than the asking price.
- FHA loan rules permit the borrower to proceed with a home loan where the asking price is higher than the appraised valie, but the borrower is required to make up the difference in cash.
- The difference between the asking price and the appraised value in such cases cannot be financed.
- The borrower cannot use the funds paid to make up the difference between the asking price and the appraised value as part of the down payment amount-the down payment required will be separate from the payment needed to close the gap between the appraised value and the asking price.
- Borrowers can always try to renegotiate the asking price of the home when the appraised value comes in lower than the sale price of the house.
FHA mortgage loans are clear on this issue, and lenders are not allowed to ask for a second appraisal just to change the valuation of the home. Ask your loan officer if you are unsure how to proceed after an appraisal when these conditions apply.
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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