An FHA loan is a mortgage loan insured by the government, specifically the Federal Housing Administration, in order to reduce the risk to lenders if a borrower defaults on their mortgage. Its conception in 1934 was in response to all the foreclosures and defaults that occurred in the 1930’s during the Great Depression. The Federal Housing Administration provided lenders with adequate insurance, which allowed loans to be issued to an otherwise risky borrower; ultimately, this stimulated the slow and unpredictable housing market. Because an FHA sponsored loan requires only a 3.5 percent down-payment and is often issued to buyers with less than perfect credit, this loan is most popular with first-time or low-income home buyers. However, you do not have to be a first-time buyer or earn a less than a certain amount to qualify for an FHA loan.
How many Buyers Use an FHA Loan?
According to The Mortgage Report, “Nearly 1 in 5 U.S. buyers use an FHA loan to finance a home purchase.” If you are one of the 20 percent who is using an FHA loan to purchase your home or are selling your home to a buyer who is using an FHA loan, before any contingencies of the loan are removed an FHA appraiser will assess the home. The appraiser will make sure everything “functions” as it should and that there are no safety issues. Since this mortgage loan is generally issued to borrowers who are considered “riskier,” a main concern is to ensure that if the loan goes into default, the home can be re-sold quickly and easily.
FHA Appraisal Guidelines
Here are some general guidelines of what the appraiser will be noting:
- The appraiser will first assess the exterior of the home. Are there cracks in the concrete or any tripping hazards in the driveway or backyard?
- He will look for any graffiti or chipping exterior paint. Lead-based paint is always hazardous and will need to be removed.
- The roof cannot leak or have more than three layers and must have at least two years of use remaining.
- If there are termite infestations, they must be treated and any damage repaired. What is the water drainage situation?
- There needs to be proper drainage around the house. Drainage is a huge consideration as water damage can be expensive and destructive.
- The windows will be checked to make sure there are no cracks and that they all open and close properly. If there are locks on a door or window, do they work?
- Pet doors in the firewall door between the garage to the house must be removed as they are considered a safety threat.
The interior of the home is equally important. The house needs be completely opened and accessible, meaning all attics, basements, and crawl spaces must be reachable. When examining the attic, the appraiser will make sure there are vents, no holes anywhere, and no exposed wires. Some things that will be noted in crawl spaces are any foundational supports issues and standing water, or if there is any debris. Are all utilities (i.e. electricity, propane/gas, water, water heater) turned on and accessible? The appraiser will need to check these systems as well as the functionality of all installed appliances. The water pressure will be measured, all toilets flushed and faucets turned on. There needs to be an available source of heat. There does not need to be an air conditioning unit; however, if one is present it should be in working condition. All electrical issues need to be repaired to avoid risk of injury or fire. Make sure no dangling wires from missing lights are visible, and that all electrical outlets work and have cover plates. Check with your state law, but in California, it is state law to have both working smoke and carbon monoxide detectors inside the home.
Every building within the parcel’s boundaries must comply with these guidelines in order to pass the FHA appraisal and receive approval for an FHA loan. Just remember, the recurring theme throughout an FHA appraisal is “safety and functionality.” All houses are unique, and it is difficult to apply objective rules for all FHA appraisals. Therefore, each appraiser will ask three main questions;
- Do all items work as they are supposed to in the home?
- Are there any health or safety problems?
- Will any issues affect the marketability of this home?