One of the most common questions I receive wearing both the appraiser and broker hats in real estate is: will this house pass the appraisal for FHA lending?
To provide some context the FHA (Federal Housing Administration) loan is offered by FHA approved lenders and are insured by FHA. This minimizes the risk for the lender. In order to offer this insurance FHA has an entire handbook (Handbook 4000.1) of guidelines that must be met with standards for the borrower(s) and the property being purchased. In order to minimize risk FHA's standards are set to ensure that the properties FHA is insuring meet certain safety and condition elements.
The role of the appraiser is to be the eyes, analyze and report defective conditions and provide photo documentation of the interior and exterior condition of the property to the lender.
Key takeaway that is hard to understand. The borrower pays up front for the appraisal in most cases. Yet, the client on the appraisal is the lender and by the Uniform Standards of Professional Appraisal Practice and its confidentiality rule: the only communication the appraiser can have is with the client on the report. If that information seems difficult to grasp, it is for most folks who pay for a service. In this case it does work in the favor of the consumer. It ensures that the appraisal will a non-partisan opinion of value and the results will be confidential. Both of which benefit the consumer.
FHA has minimum property requirements and standards that the property must meet in order to be eligible for an FHA insured loan.
FHA requirements begin with legal use. The property's zoning must be reported and the property must comply with all zoning ordinances.
The appraiser must report on any encroachments that might affect the property. That is, any intrusion on the real estate being used for collateral in any way physically. Easements and deed restrictions must be reported on as well if they would affect use, value or marketability in any way.
The appraiser is asked to comment on any externalities. Any heavy traffic, airport noise, overhead power lines or anything else outside the property boundaries that would affect use, value or marketability of the property.
The appraiser will be asked to verify the access to the property is an all-weather road surface over which typical passenger and emergency vehicles could traverse regardless of the weather conditions. The appraiser must also describe the access, either private or public and make note of the condition of the access.
The appraiser must note onsite hazards or nuisances and conditions that could endanger the health and safety of the occupants or affect marketability going forward.
These health and safety standards include looking at the grading to make sure there is no standing water around the foundation or in the crawlspace or basement and that positive drainage away from the structure is being achieved. The appraiser is to look for the existence of sinkholes, slush pits, underground storage tanks or other environmental hazards on the property. The appraiser will research and report on the location of the property and identify if it is in a Special Flood Hazard Area.
Inside the home there are many more requirements to ensure the health and safety of the occupants in the future. The appraiser is to make a thorough inspection of the home including a head and shoulders inspection of the attic and crawlspace or walk through of the basement to see all readily observable conditions. If there are any mechanical systems in the basement the crawlspace is to be at least 18" in height to accommodate maintenance on those systems.
The appraiser will research and report on there being a safe and potable water source with sufficient pressure and available hot water working to be of use for residential dwelling. Every living unit must have one bathroom with at least a toilet, shower and water closet with safe method of sewage disposal. The appraiser must operate the toilets and water faucets to discover function and the presence of leaks.
Electricity sufficient to support lighting, cooking, and mechanical equipment used in the living area. The appraiser is to test a representative number of outlets in each room to make sure the electric is safely operating. The appraiser is also to test the light switches. The electrical system is evaluated for the presence of frayed or exposed wiring.
If the home was built prior to 1978 there is to be no chipping or peeling paint either on the interior or exterior of the building or any detached outbuilding. The presence chipping or peeling paint in a home built before 1978 will require correction.
Bedrooms are to have a form of ingress and egress in case of an emergency.
The foundation is inspected and commented on to make sure it is not subject to a foundation issue or termite infestation. Appliances must be operational. The condition of the plumbing, electrical and heating systems is to be noted. Central air is not a requirement. The mechanical systems are to be identified as safe to operate and have a reasonable future utility. The roof is to be observed and must have at least 2 more years of useful life left.
When any of these minimum property requirements or minimum property standards are not met the appraiser will make report of the necessary repairs to bring the property into compliance. The buyers, sellers and their respective brokers will work through the negotiations and logistics of coming to compliance. The appraiser will then come back out to do a final inspection to verify that the work is complete and compliance is achieved.
Another question I get frequently is from sellers is: "why can't we include my finished basement in the total finished square footage". My typical answer is that the market aka me responds to finished basement differently than above grade square footage. For instance: we have a basement bedroom at my family's lakehouse. When the spare bedroom upstairs is not being used where do you think you will find me? Upstairs every time there is an opportunity above grade.
The FHA Handbook also lays out the process for measuring and reporting Gross Living Area (GLA) in a dwelling unit.
Gross Living Area
Definition - "Gross Living Area (GLA) refers to the total area of finished, above-grade residential space calculated by measuring the outside perimeter of the Structure. It includes only finished, habitable, above-grade living space."
"When any part of a finished level is below grade, the Appraiser must report all of that level as below-grade finished area, and report that space on a different line in the appraisal report, unless the market considers it to be Partially Below-Grade Habitable Space."
It is required that specifically finished basements, and unfinished attic areas are not included in the total GLA. The FHA Handbook calls for the appraiser to treat Modular Housing the same as stick-built housing including using the same form for reporting of both products.
FHA will ensure homes with an Accessory Dwelling Unit (ADU), a cistern, a spring or several other anomalies under certain conditions. They must be legal uses and typically the appraiser must be able to provide at least one comparable sale in the market with that characteristic to prove the marketability of those characteristics in the local market.
When you list these requirements out it seems that these requirements cover the gamut of what the prudent buyer would ask in the way of questions or the process of discovery a typical buyer would follow to purchase a property. The purchase is an investment, as is the offering of an FHA insured loan. These steps are in place to manage the risk of the lender and also to protect the consumer in the process.
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