Basic FHA Loan Appraisal Rules
The appraisal process is important because the lender is required not only to assign a fair market value to the home and make sure it’s habitable, but that the property can retain value over the lifetime of the loan. Your new home isn’t much use if you can’t sell it again later for a reasonable price.
FHA appraisal rules are designed in part to make sure the home does have “remaining economic value” suitable for the entire loan term. How does the FHA do this?
Basic FHA Requirements for the Living Unit
Your FHA home loan is governed by the rules found in HUD 4000.1, the FHA loan handbook. That includes guidelines for the appraisal process. To begin with, FHA loan rules say the home you buy with your FHA mortgage must meet (or be brought in compliance in order to meet) the following:
- A continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate quality for all household uses;
- Sanitary facilities and a safe method of sewage disposal. Every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower;
- Adequate space for healthful and comfortable living conditions; heating adequate for healthful and comfortable living conditions;
- Domestic hot water;
- Electricity adequate for lighting, cooking and for mechanical equipment used in the living unit.
The FHA appraisal process is also designed to help the lender determine that your home is free of environmental, health, or safety hazards including the addition (in recent years) of guidelines for properties that appear to be affected by methamphetamine use or manufacture.
“If the Mortgagee or the Appraiser identifies a Property as contaminated by the presence of methamphetamine (meth), either by its manufacture or by consumption, the Property is ineligible due to this environmental hazard until the Property is certified safe for habitation.”
The FHA rules on appraisals do not cover every possible contingency. Borrowers may not be able to reference a rule or some kind of guidance from HUD 4000.1 for all situations. One reason for that is that the FHA defers in many cases to state or local housing code or related guidance.
The FHA does not keep copies of building code regulations for every housing market, so in cases where there are specific appraisal issues that HUD 4000.1 does not speak directly to, the lender and appraiser will likely fall back on state/local requirements.
And in conclusion it must be pointed out that appraisal and compliance requirements are different for FHA rehab loans than for new purchase loans. We will explore those differences in another article, but it’s important to know that FHA rehab loans would require the home to be brought into compliance with FHA standards and state/local building code as part of the rehab project and a condition of loan approval.
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