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The FHA appraisal is a requirement of the home loan process. A tool for lenders to establish the fair market value of a home and ensure it meets local requirements, the appraisal is NOT the same as a separate, borrower-funded home inspection.

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New FHA Appraisal Basics

May 14, 2020

New FHA Appraisal Basics
The FHA appraisal is a requirement of the home loan process. A tool for lenders to establish the fair market value of a home and ensure it meets local requirements, the appraisal is NOT the same as a separate, borrower-funded home inspection, and the results of the appraisal should not be mistaken for a home inspection.

Appraisals are required for all forward mortgages in the FHA Single-Family Home Loan program but recent changes to appraisal rules in 2020 (as a response to the COVID-19 novel coronavirus pandemic) make the process operate differently than before, however temporarily.

In March of 2020, the FHA and HUD issued a Mortgagee Letter announcing temporary changes to the appraisal requirements that included the ability to have an exterior-only appraisal or a desktop appraisal.

This means that it’s entirely possible you can have a home appraised without an FHA appraiser looking inside the property. We’ll get to the implications of that later, but some first-time borrowers want to know the basics about this process.

What an FHA Appraisal Does

Ask an industry pro about the real estate appraisal process and you’ll learn appraisals should be considered a tool for the lender that helps establish the fair market value of the home, as stated above. Why is this needed?
 
It helps the lender determine the maximum loan amount for your transaction. It also theoretically ensures the home meets minimum code requirements--something that can protect a borrower later on when it’s time to sell the home. If your property has defects, you may be required to correct those defects if you choose to sell later on, or even remain in the home for a certain period of time.

What an Inspection Does

Home inspections are borrower-arranged and borrower-paid. They are not a requirement per se, but skipping one is a very bad idea. Inspections are meant specifically for the home buyer. The inspection is meant to be a more complete review of the condition of the home to help the buyer make an informed decision about buying the property.

Back to the appraisal process,HUD 4000.1 has instructions for how the FHA appraisal is to be done. “As the on-site representative for the Mortgagee, the Appraiser provides preliminary verification that a Property meets the Property Acceptability Criteria, which includes HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).”

But the new, temporary rules added for coronavirus pandemic concerns mean two important things:
 
  • Your appraisal is likely to be exterior-only and your appraiser may never see issues related to mold, water in the basement or crawlspace, etc. You WILL need a home inspection
  • Under the current appraisal rules, your home may be appraised “as-is” unless Minimum Property Requirements-related deficiencies “are observed from the street or otherwise known.”
The changes the FHA and HUD have made are NOT permanent at the time of this writing but there is no built-in expiration date, either. Much depends on how things are handled by government agencies as the coronavirus pandemic unfolds.

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