December 7, 2018
If you are serious about buying a particular home with an FHA mortgage loan, one of the big steps in the process heading toward loan approval is the FHA appraisal.
The appraisal process and the home inspection are not the same thing, do not address the same concerns, and are intended for different users. What are these differences and why should you as the house hunter care about them?
FHA Appraisals Are A Lender’s Tool
The home that is appraised by an FHA fee appraiser does so in service of the lender, not the borrower. The lender is interested in knowing that the home meets minimum FHA standards and applicable building codes.
The lender is also interested in setting a fair market value for the home; that is done by appraising not only the home’s condition where those minimum standards apply but also by comparing the home to similar properties in the housing market it’s located in.
FHA Appraisals Are Not Intended For The Borrower
Homes may meet FHA loan and lender standards, but the appraisal process does not uncover hidden problems with the home. The appraisal is not designed to do that, the appraiser will not be looking for hidden issues, and in many cases they cannot.
The roof, for example, is not an area of the home the appraiser is required to step onto for inspection. The appraiser is not an expert in electrical systems, plumbing, HVAC, or other complex mechanical components of the home.
Home Inspections Are A Tool For The Borrower
When you apply for an FHA mortgage or any other type of purchase loan, you should invest in the optional but critically important home inspection to give you a much better idea as to the true condition of the home. An appraisal simply cannot do the job the home inspection is designed to do.
The home inspection will protect the borrower from making a poorly informed decision about buying or passing on the home. The inspection is not for properties you aren’t committed to buying; this process should occur when you want to make a genuine offer to purchase.
The FHA Appraisal Process Protects The Borrower In One Way The Home Inspection Does Not Address
Don’t be fooled by that headline, this borrower protection has nothing whatsoever to do with the condition of the home, but rather the price of it; FHA loans do not allow the seller to force the buyer to purchase a home when the appraised value comes in lower than the asking price.
This protection is designed to give the borrower the option to decline to buy, penalty-free, in such cases. Why? Because FHA loans are required to have the amount based in part on the asking price or appraised value, whichever is lower. The FHA can’t force the borrower to take a loan where they are required to pay the difference between the asking price and the appraised value out of pocket.
The borrower is absolutely free to choose to do so if that is their wish, but they cannot be forced into the transaction or penalized for backing out under such conditions. Ask your loan officer about this kind of protection if you aren’t sure how it works.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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