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FHA Appraisal Issues



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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

split level patio doorI 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?

As the son of two music teachers, Ben spent his first 21 years trying to make a living with his slightly above average trumpet playing. After no return calls from Dizzy Gillespie and then a failed attempt at becoming a fly girl on "In Living Color," he switched gears and finally found his nichè in real estate. He's a Minnesota appraiser and also a Realtor with his better half, Stacia. Labeled “one to watch” from an anonymous source (thanks mom), Ben is smart, good looking, athletic and a rock star inside his own head. He also never passes up a chance to write his own bio. Find him online at twitter or selling Stillwater Real Estate.

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  1. ines

    June 18, 2009 at 6:41 pm

    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.

    • TJ

      July 12, 2011 at 7:34 am

      I'm a seller and the buyer has been trying to get an FHA loan for months. First, the FHA appraiser came back with a laundry list of fixes. Foundation, electrical, plumbing….you name it, they wanted something done to it……and the house is a good, solid one. Thousands of dollars and work later, everything was submitted to FHA's appraiser again. Guess what. A new laundry list which included points like: you did not use a licensed structural engineer. Ha! We did, and the licensed structural engineer even did work for other FHA appraisals and received approval! Instead of just certain electrical repairs, FHA is calling for a full house electrical inspection and repair. I could go on and on.

      The bottom line is that I am tired to trying to satisfy FHA. I will not be selling to anyone who hopes to obtain an FHA loan.

      FHA, if you're listening, you are CAUSING our housing crisis. You are keeping good buyers from purchasing good houses. WAKE UP!

  2. Louise Scoggins

    June 18, 2009 at 6:59 pm

    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?

  3. Missy Caulk

    June 18, 2009 at 7:54 pm

    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.

  4. Ben Goheen

    June 18, 2009 at 9:04 pm

    @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.

  5. Barry Bevis

    June 19, 2009 at 2:06 am

    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.

  6. Joe Loomer

    June 19, 2009 at 1:16 pm

    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.

    Navy Chief, Navy Pride

  7. Joespake

    June 19, 2009 at 2:07 pm

    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.

  8. roger mathew

    July 10, 2009 at 6:08 pm

    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?

  9. Ben Goheen

    July 10, 2009 at 7:49 pm

    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.

  10. Jim S

    July 24, 2009 at 5:14 pm

    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.

  11. Nashville Grant

    March 12, 2010 at 10:36 pm

    I’m pretty sure appraisers are evil (sorry, just read Gwen’s last article and she got me in this mood). I do have a real question: do appraisers usually use the cost basis method when appraising new construction short sales? Seemed unusual to me.

  12. Marc

    August 11, 2010 at 4:43 pm

    i am currently looking at a home that appears to have about a three inch water mark in the upstairs hallway but the owner of the home no longer lives in the country. I will be going with an fha loan but im not sure how picky they will be with this. the owner stated he will not be returning and will not be able to fix anything. I cannot see any visable damage in the attic or anywhere around else. Does anyone think its even worth spending the money on the inspection if im going with a fha loan?

    • Benn Rosales

      August 11, 2010 at 5:19 pm

      If you even need to ask then you should, and you should anyway even if you didn’t ask. Inspections are designed to illuminate problems before risk is taken by all parties, including FHA.

  13. Dave Fife

    September 27, 2010 at 3:24 am

    So in your article example of the patio block stop, does this disqualify it for an FHA loan, if it is impossible to open that patio door, while the block stop is in place? It seems that the missing balcony/deck interferes with the functional usability of the property. To me it would seem intuitive that the home missing the rear deck would be ineligible for FHA.

    • Ben Goheen

      September 27, 2010 at 8:55 pm

      Dave: FHA guidelines don’t state that a deck is required. I understand your question and it seems like there should be one if there is a patio door. However, often times in my area new homes are built without one to save money and the homeowner will build it later if they wish. The stop in the door track prohibits a person from opening the door and falling 10-15 feet to the ground, which is a general safety issue.

      I just inspected a home today for an FHA loan where there was an upper lever door with a huge drop:

  14. Jen

    July 14, 2011 at 11:07 pm

    Hello my name is Jen and I am in the process of getting a FHA 203(k) loan for a home in Pennsylvania and we have already had the home inspection done and it didn't go that well. I was just wondering if there is anyone that can let me know what do the appraisers look for. I am working with the sellers to get everything fixed before the appraisal but some of the issues found during the inspection just seem like a joke. For example, the wax ring on the toilet and caulking around the tub. I just want to know what would and wouldn't need to be fixed before the appraiser goes in and we lose the loan and house. Please help me I need to know what to do so we don't lose this house, I really don't have time to go back to square one. I am living in Michigan right now homeless (staying with family) with my two sons and my husband is in Pennsylvania staying with family. I just want this appraisal process to go as smooth as possible. So my family can have a house together.

    Thank you so much
    Please email me with any info on appraisals anyone can dig up

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