One reason I was brought on board here at AG is because I’m both a Realtor and Certified Residential Appraiser. In the 8 years and 2,000+ homes I’ve inspected I’ve seen the good, bad and everything in between. A few years ago FHA loans were rarely used. But now with their low down payment requirements and nearly all the crazy programs gone they have become a lending staple again. FHA appraisal inspections are more detailed and there are some commons issues that I see when inspecting homes:
Mechanical Systems Check
Let’s face it – foreclosures are a big part of nearly every market area. So many of my FHA appraisals lately have been on lender owned properties. Here in frozen tundra (Minnesota & Wisconsin) foreclosures are almost automatically winterized, even in the middle of summer. For you warm-weathered readers this process involves shutting off water and pumping anti-freeze into the pipes, turning off the gas or setting the furnace to somewhere around 50°, and sometimes turning off the electric.
Since FHA appraisal inspections are more thorough they require a test of all mechanical systems. Do you see the train wreck coming? When lenders are already loosing thousands of dollars on a property, getting them to spend money on having someone de-winterize the property isn’t always easy – but it is required.
Lead Based Paint
If a home was built before 1978 and has chipping, flaking or peeling paint it has the potential of being lead based. This means both the interior and exterior of the home, including surfaces on fences, detached garages, storage sheds and other out buildings.
Patio Block Stop
I probably just lost 1/2 the readers here, but hang with me for a moment. In my market area split level homes are as common as -20° wind chill in February. Take a look at the photo to the right (click for a larger view). I’m talking about the patio door on the upper level above the ledger board – where a deck should be but the prior owner couldn’t afford the mortgage let alone spend money on improvements. This goes into the FHA safety category where someone could open that door and be injured falling down to the ground. Obviously having a deck is more aesthetically pleasing, but the more economical solution is to screw a wood block into the track of the door so it can only be opened a couple inches.
FHA’s rule of thumb is that any required repairs should preserve the continued marketability of the property and protect the health and safety of the occupants – or the three S’s:
• Safety: protect the health and safety of the occupants
• Security: protect the security of the property (security for the FHA insured mortgage)
• Soundness: correct physical deficiencies or conditions affecting structural integrity
What are some common FHA appraisal issues in your area?
(3 votes, average: 4.67 out of 5)
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Hey Ben – we don’t deal with a lot of FHA loans but certainly do enough of them to know better. The winterizing issue is non-existent in Miami but I could certainly see the train wreck. The lead based paint issue is one that inspectors just oversee because most homes we deal with are definitely built before 78 and all the seller and buyer need to do is sign a lead-disclosure.
The Patio Block Stop made me laugh – that house would never pass code here in South Florida and the solution is to actually install a railing right on the siding of the house – that way the doors can be opened all the way and although a “fake balcony”, it solves the issue.
More common FHA issues here have to do with roofing and electrical systems. If a house needs a new roof, you won’t get the loan – if you don’t get the loan, you can’t get a new roof – so it’s easier to discard those homes altogether. Electrical is a little easier because sometimes you can get an affidavit from the electrical contractor who will do the work and the bank may hold on to the estimated price.
I wonder how other parts of the country deal with missing appliances when dealing with FHA loans? This can be another small nightmare in South Florida.
Hi, Ben! We do a LOT of FHA loans here and it is the #1 loan choice for 95% of my buyers. With foreclosures being rampant in our area, I have started asking listing agents if they think the home will qualify for FHA before taking my clients to see it. Sometimes it’s hard to see from the MLS pictures but the agent has (presumably) been to the property and has an understanding of it’s condition. I have also noticed some agents commenting in the “private” remarks something along the lines of, cash or conv only, no FHA.
I would say roof and wood rot are 2 common objections, as well as flooring and light fixtures…many REO properties are lacking in some of these areas. These are comments I frequently get when chatting with the listing agents. I once had a VA appraisal require us to fix some rotted wood trip prior to closing.
Ben, something that’s becoming more frequent in my area is the use of FHA 203K rehab loans. How do the appraisal standards differ for the 203K from a regular FHA appraisal?
Ben, I read every word. I am always loving to hear about how appraisals work or don’t work.
We had a house like that FHA listed. It was only a step down to the grass, it had a bar on it. The appraiser made us come but the bars closer together to close, so we hired a handy man and did it.
Then the new buyer took it down right after closing.
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@Ines – A home inspector can look past the lead based paint issue but FHA guidelines state that for an appraisal peeling, chipping or cracked paint needs to be repaired. I’ve seen the faux-balcony solution a few times, which is way cheaper than installing a deck but more expensive than a block of wood. I’ve found that depending on the underwriter the missing appliances may or may not be a big deal. Some make sure the home has a stove to be approved. Guess they’ve never been to my casa for dinner – the microwave does just fine.
Louise – I’m starting to see more comments about ‘no FHA financing’ in agent remarks. Wood rot and termites aren’t much of an issue in Minnesota because they can’t survive the 10 months of winter. An update to the FHA appraisal guidelines states that repairs are not needed for minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the safety of the occupants or security and and soundness of the property. This includes “bare floors, badly soiled carpeting and cracked plaster and sheetrock.” My understanding is that the FHA appraisal requirements are the same for a 203k rehab loan. I’ve only run into one and it was a complete nightmare – a newer 1.5 story log home on 5 acres in the middle of nowhere. As you can imagine comps were super easy to find for that one. After I was done it turns out the buyer didn’t qualify for financing because of some self-employed tax issues.
@missycaulk – apparently your appraiser thought 1 step down was a safety concern – it’s a judgment call. I would have done the same thing as the homeowner if it was my place.
Funny how often this is coming up- the FHA auditor has almost sunk two of my recent closings. The WDO inspector noted some moisture in the crawl space. It was minimal and had come through a concrete block stem wall after a 100year rain event. We had to pay a contractor to inspect and write a letter that the water did not pose a structural issue.
Wood rot is also a common problem in Florida- but most of the issues are not structural and do not keep us from closing.
FHA and VA loans make up almost 50% of our market here in Augusta (Fort Gordon is a major military installation).
In addition to Lead Based Paint, we also have the typical Florida issues with termites and wood rot. VA foreclosures get semi-winterized without the antifreeze.
The biggest problem I actually have is that some agents actually GIVE the appraiser the home inspection report. Imagine a scenario where you agree to repair certain items, but then the appraiser comes in with repair requirements that no appraiser would even have checked in the first place (remove minor personal items from an attic on a vacant property, for example). The wording is verbatim from the Inspection Reports and in some cases actually cites the report as a referrence.
It’s sand-bagging – getting repairs in that the Seller and Buyer did not negotiate via the FHA exhibit. Sellers are so far along in the closing process they literally get stuck with additional costs AFTER the buyer’s due diligence negotations regarding repairs. So much for rules regarding agents contacting appraisers. I find myself in the situation now that I tell my Sellers to expect some items to come back in to play after the appraisal.
Boy – I got in to a little venting there!
Georgia has a requirement coming in November that FHA Appraisers must be certified (whatever that means) or have a college degree related to real estate inspecting. I like the new rules, most don’t. Although they placed this requirement on Appraisers, the Governor vetoed a similar bill requiring Home Inspectors to be licensed.
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The median price in my market falls well below the FHA limit, so there are numerous FHA financed transactions here. If banks and investors would put a little money into their foreclosed properties to pass an FHA appraisal, it would stimulate the market. The position of the banks: [with arms folded] “as is, where is” is just not practical with the increasing numbers of FHA buyers out there. Many of the REO properties I show could be brought up to FHA standards for a few hundred dollars.
Hi
I had a quick question. One of my clients had a buyer who was using the FHA loan/appriaser. The appraisal came lower than the price and deal fell through. The buyer never communicated the appraised value and just walked off. Now, the seller wants to know the amount at which it was appraised so they can adjust their price. My question would be that is the seller entitle to a copy of the appraisal? How can go about getting a copy and how long does it take?
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Roger – the potential buyer or their agent might tell you the value out of common courtesy. However, they have absolutely no obligation to letting you know what the appraised value was. I wouldn’t even try asking the appraiser – their client is the lender, not you.
Hi,
Another quick question. It looks the deal to sell my home may fall through because, while my home appraised well 3 months ago when it went on sale, now that I have a potential buyer, the FHA appraisal is looking at what are now the most recent sales in my area. Unfortunately, all recent sales have been foreclosures. So it looks like the comps are all well below the agreed-upon price for my home. The buyer can’t scrape together more $ for the purchase, though he and his realtor agree that my house is indeed worth the price they are offering. Any suggestions? It seems like all those who foreclosed in my area are penalizing me for attempting to unload my house the traditional way.