Part of the process of qualifying for an FHA loan involves passing an FHA home appraisal. It is important to understand that while the appraisal may provide some benefit to you, the FHA maintains this requirement for the benefit of the FHA and your lender, rather than you. As a result, if you get a terrible FHA home appraisal, not only must you consider the reasons the appraisal is so bad and whether repairs can restore the home to FHA minimum standards, you must also consider whether the home meets your minimum standards.
An FHA home appraisal accomplishes two objectives. The first objective serves the FHA by determining whether the home is in acceptable condition. To accomplish this objective, FHA appraisers conduct a thorough inspection of the home, focusing only on factors that affect insurability, such as health and safety issues. The second objective of an FHA appraisal serves your lender by providing reasonable assurance that if you default on your mortgage the home can sell for at least the amount of the loan. FHA guidelines provide loan insurance of up to 98.15 percent of the appraisal value of the home or the asking price of the home, whichever is the lower amount. For example, if the asking price of a home is $170,000 and an FHA appraisal comes in at $150,000, the maximum loan insurance the FHA will provide is $147,225. Failing to accomplish either objective can lead to rejection of your loan application.
Although an FHA inspector must document every variation from FHA standards whether large or small, not all affect the outcome of the inspection. When a home fails the inspection portion of the appraisal, it means there are serious safety and/or health issues present. If you get terrible results in this part of the appraisal, it means that, at a minimum, there are one or more problems relating to the roof, foundation or structure, exterior or interior paint finishes such as the presence of lead-based paint, or lack of access to or escape from bedrooms to the exterior of the home. Before your home can pass, these conditions must undergo repairs, regardless of who pays the bill, before closing on the loan.
Loan to Value Failure
If your FHA appraisal is terrible in terms of value compared to asking price, it means your home does not measure up to similarly priced homes in your area and is not worth its asking price. In this case, your lender will either require a reduction in the asking price or a down payment sufficient to cover the difference. Failure to meet one of these two options will most likely result in denial of your application.
If you get a terrible FHA home appraisal, you can ask your lender to request a second appraisal, but it is under no obligation to comply with your request unless the second inspection is to inspect repairs. Considering that FHA standards do not include a variety of additional issues the home may have, you may want to reconsider your decision to purchase this particular home. In addition, if you decide to increase the size of your down payment to cover any difference in value, consider the effect this may have on home equity and whether you will recoup this money if and when you decide to sell.
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