When buying a house with financing, the lender must verify the home's value and condition. Usually through ordering an appraisal. Conventional and FHA appraisals have slightly different processes and may vary in their requirements.
Tip. Federal Housing Administration, or FHA, loans typically have strict appraisal inspection guidelines. A conventional appraisal and FHA appraisal may have different requirements for passing inspection.
The Conventional Appraisal
Conventional appraisers base their valuation of a home's worth on three essential factors: location, condition and area comparable sales for similar houses. They'll also look for safety or health concerns in the home that would diminish the desirability of the home and thus reduce its value. A seller can help the appraisal value of their home by having a home inspection before marketing the house and making sure systems, like the air conditioner, furnace and water heater are in working condition. Completing unfinished projects, patching holes in the wall and removing chipped paint can also help a conventional appraisal. Buyers must keep in mind that the conventional appraisal is no substitute for a certified home inspection and termite inspection.
Although the general condition of the property affects the property value and, as a result, the amount of money a mortgage company is willing to lend, there's no requirement for a property to meet specific standards as long as the selling price and requested loan amount fall within the valuation amount.
The FHA Appraisal
Federal Housing Administration loans can help buyers secure a home for as little as a 3.5 percent down payment. To secure a mortgage, the property must meet FHA minimum standards and meet a fair market value. The Department of Housing and Urban Development, which oversees the FHA, mandates that any aspect of the property that falls short of these requirements must be repaired before the FHA loan can proceed. As such, FHA appraisals are usually more strict than conventional appraisals. To qualify for an FHA loan, the appraisal must show:
The roof is in good repair with no work needed for two years.
There's enough living space for the family and satisfactory general condition of the home.
Access to the house from the street.
A solid foundation.
Safe stairways with handrails adequately installed.
No chipped, lead-based paint.
Furnace, water heater and all appliances are operable
Any environmental or noise issues – such as an airport zone – and how they impact property value
The FHA doesn't dictate fees for appraisals, but you can generally expect them to run on the higher end of average costs – about $410 to $460 in the Chicagoland area. The price varies on the size and type of home. If you're the home's seller, make sure the house conforms to FHA guidelines by making needed repairs prior to the appraisal inspection. Correcting needed repairs may also help boost the home's value at the time of the appraisal inspection.
Written by Jodi Thornton-O'Connell; Reviewed by Karina C. Hernandez, Realtor
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