Mortgage lenders require an appraisal of each home they extend financing for. This is to ensure they aren’t lending too much mortgage for a home that isn’t worth it.

If you plan to buy a home using a government-backed mortgage insured by the Federal Housing Administration (FHA), the property must go through an FHA appraisal to determine whether it meets certain standards and criteria. These standards, outlined by the U.S. Department of Housing and Urban Development (HUD) in its Single Family Housing Policy Handbook, are generally designed to ensure that the property is safe, sound and secure.

What is an FHA appraisal?

FHA mortgages are home loans that allow for a lower minimum credit score and down payment than many conventional loans. These loans are funded by a bank or other type of mortgage lender, but backed by the federal government. In order to purchase a home with this type of loan, the property must go through the FHA appraisal process.

“In order to back a mortgage, the government needs to make sure the loan is a sound investment, which is why they require a special FHA-specific appraisal,” says Christopher Linsell, real estate coach and writer for The Close, a real estate advice site. “This appraisal serves two purposes: The first is to assess the market value of the house. The government will want to ensure the loan amount they will be backing is equal to or less than the market value of the home. The second is that they will also want to assess the home’s condition, longevity and livability.”

How does the FHA appraisal work?

The FHA appraisal process typically looks like this:

  1. Appraiser visits – An FHA-approved, licensed appraiser visits the property to inspect its condition, including its interior, exterior and surroundings.
  2. Appraiser gives opinion and report – The appraiser takes photos to document the property’s condition and, in the case of a single-family home, complete a form called the Uniform Residential Appraisal Report, which outlines the various features of the property. For a condominium, the appraiser will complete a Condominium Unit Appraisal Report. In addition to reviewing the home’s condition, the appraiser will provide the FHA with an opinion regarding the property’s market value.
  3. Appraiser makes recommendations – If the property examination reveals issues that do not comply with HUD’s acceptability criteria, the appraiser indicates the exact repairs necessary and provides the approximate cost to fix the problems.

In some cases, an FHA appraiser is not able to determine whether a property truly meets HUD’s standards, and the mortgage lender might call upon another qualified inspector to review the property as well.

In general, you can expect an FHA appraisal to be completed within a week.

How much does an FHA appraisal cost?

An FHA appraisal costs an average of $300 to $425, according to HomeGuide. This is a typical range for non-FHA appraisals, as well.

FHA appraisal vs. home inspection

An appraisal isn’t the same as a home inspection. One key difference between an appraisal and inspection: The FHA requires an appraisal (and so do many mortgage lenders for all kinds of loans), while an inspection is an optional but highly recommended step homebuyers can elect to take.

The other difference: An appraisal offers an opinion of the home’s value based on recently-sold, comparable properties. Put another way, it helps describe what a buyer might pay for the home given the state of the current market. An inspection, on the other hand, gives the buyer a sense of the condition of the home and whether there’s any major damage that might make it not worth purchasing. Unlike an appraisal, an inspection won’t tell you the home’s value.

What does an FHA appraiser look for?

An FHA appraiser will observe, analyze and report on whether a property meets HUD’s “minimum property requirements” and, in the case of new construction, the property must also meet “minimum property standards.”

As HUD’s Single-Family Housing Policy Handbook explains, the minimum property requirements are FHA’s general requirements that all homes it insures be safe, sound and secure. The minimum property standards, on the other hand, address the specific regulatory requirements surrounding the safety, soundness and security of new construction.

New construction is defined by HUD as properties under construction, proposed construction or properties that were built less than one year ago. Existing construction is a property that has been 100-percent complete for more than one year or, if it was completed less than one year ago, it was previously occupied.

An appraiser’s observations will generally be limited to readily observable conditions and are not the same as the comprehensive inspection performed by a licensed home inspector during the homebuying process.

“FHA appraisers are required to make sure the property is functional,” says Ralph DiBugnara, president of Home Qualified. “So, that means things like the electric and utilities work properly. They are also focused on the health and safety of the home — for example, stair railings are secure and functional, stairs and outside walkways are not cracked or dangerous. They are also going to make sure there’s no chipped or damaged paint that contains lead. All windows and doors must have safety releases and open properly.”

FHA appraisal guidelines

HUD’s Single-Family Housing Policy Handbook, which is not easy reading for the average homebuyer, details a long list of conditions that will be reviewed as part of the appraisal process.

For new construction, the appraiser’s review will include looking for defective conditions such as:

  •     Defective construction
  •     Evidence of continuing settlement
  •     Excessive dampness
  •     Leakage
  •     Decay
  •     Termites
  •     Lead paint and drywall

Additional requirements for any property (new or existing) include:

  • Continuing and sufficient supply of safe and potable water with adequate pressure
  • Safe method of sewage disposal
  • Adequate space for healthful and comfortable living conditions
  • Hot water
  • Electricity adequate for lighting
  • Operational appliances
  • Solid foundation
  • No lead paint
  • Proper grading and drainage surrounding the property

The appraiser’s review will include onsite and offsite conditions, too. Offsite conditions that might be considered include such factors as heavy traffic, airport noise and proximity to high-pressure gas lines or overhead electric power lines.

While there’s not a lot a prospective buyer can do to get ready for an FHA appraisal, sellers going through this process can certainly do their homework to help ensure their property meets HUD criteria.

“As a property seller, the best way to prepare for an FHA appraisal is to visit HUD’s website and review the minimum property standards in order to make sure your home will pass that inspection,” says Linsell.

Use this checklist as a guide:

Illustration by Hunter Newton/Bankrate

Next steps after an FHA appraisal

Once the FHA appraisal has been completed, the mortgage lender will review the report and might ask for repairs to be completed based on the appraiser’s recommendations.

“The appraisal will outline exactly what needs to be repaired for the appraisal to be FHA-compliant,” says DiBugnara.

Who is responsible for repairs?

The seller is generally responsible for repairs unless otherwise stated in the sale contract. Some contracts will stipulate that the property is being bought as is, says DiBugnara. These repairs are expected to be completed before closing.

Not all sellers will be willing to make repairs, however, which means that as the buyer, you may have to continue searching for an FHA-compliant property.

You also have the option of choosing an FHA 203(k) loan, which allows for financing both the purchase of the home and the required repairs through a single mortgage. Borrowers can make a variety of repairs using an FHA 203(k) loan. These fixes include structural alterations, reconstruction, modernization and elimination of health and safety hazards.

One last option, if your income and credit score allow, is to purchase the home using a conventional mortgage.

Sometimes, the appraised value turns out to be lower than the purchase price. When this happens, the buyer and seller can decide to negotiate a lower price, or, if the seller doesn’t want to settle for less — and there’s an appraisal contingency — the buyer can walk away.

It’s worth noting that an appraisal can be valid for up to six months or more, especially in a market where home values aren’t appreciating as fast. In a hotter market, an appraisal might only be good for three months before becoming outdated.

Bottom line

An appraisal is a necessary step in the process of obtaining an FHA loan. Along with ensuring the home’s value is aligned with what the lender is willing to let you borrow, the appraisal also confirms the home meets FHA’s guidelines surrounding safety and habitability. If you’re the seller, you’ll need to be prepared to meet these criteria, or make repairs or negotiate with the buyer, if needed.