When utilizing an FHA loan, lending rules require an appraisal conducted by an FHA-approved appraiser for the standard sales transaction. This appraisal serves two purposes: firstly, to determine the current value using appropriate comparables (comps) from the local vicinity, and secondly, to ensure that the property condition aligns with HUD's/FHA's minimum property standards.
Just so you know, the condition and appraised value of the property are based on a specific moment in time, reflecting the value and condition as of the date of the appraisal inspection. It may seem confusing, but sales that occur after the inspection date, the property's previous sales data (unless it's a flip), or any changes or repairs made after the inspection date usually do not affect the appraiser's assessment of the condition and value in the report.
It is important to always keep in mind that FHA appraisal and inspection rules are designed to safeguard the interests of the buyer and the lender, rather than benefiting the seller. These regulations serve to protect the buyer by identifying possible repair issues that could lead to significant costs after the sale, expenses that the FHA buyer may not be prepared for. Furthermore, these rules also shield the lender by ensuring that any necessary repairs or existing conditions do not impact the current or future value of the property. In cases where a buyer has made a minimal down payment and therefore has little to no equity initially, facing substantial financial burdens to maintain the property livable may increase the risk of the buyer walking away, potentially resulting in loan default and foreclosure proceedings.
Please note that the list below is provided for reference purposes only and does not imply compliance with FHA Minimum Property Requirements (MPRs). These requirements are in place to safeguard the well-being of the residents and/or the market value of the property.
Basements or Crawl Spaces
Vented
Clear of debris and vermin.
18” clearance from grade to bottom of floor joists required for maintenance if system components are present.
Excessive dampness or ponding of water must be corrected.
Lack of access is acceptable if area contains no mechanical systems.
Attic Spaces
Attic should be observed when possible, however an inaccessible attic is acceptable.
Beyond that, the attic will be checked for several issues.
The appraiser will determine if there is an adequate amount of insulation.
The appraiser will look at the rafters and decking to ensure the wood is in good shape with no appearance of damage, moisture, or mildew.
Signs of any type of leaks. Leaks can come in the form of a hole through the shingles and decking, or they can be around a chimney or vent.
If there are any wires in the attic, they will be inspected for fraying or other signs of damage.
A brief look will be made in select spots to see if there is an infestation of insects or rodents.
The appraiser will look to see that air can flow through the attic without any obstructions.
Any items that are stored in the attic will need to be moved to the side or removed completely for the appraiser to have an unobstructed view of the necessary components.
Electrical Wiring
Electrical system must be adequate, safe and operable with no exposed electrical wiring. The fuses, breakers, and wiring of the home should be able to handle the basic needs of the property on a normal day. Any wire that is exposed or shows signs of fraying will need to be repaired. Faulty fuses, damaged or outdated breakers may need to be either repaired or replaced.
Beyond the wiring, the appraiser will check the outlets and light switches to make sure they are functioning properly.
Working Condition of Appliances
If any of the appliances are staying with the home after the sale, then the appraiser will need to determine if the items are in working order. Examples of appliances that need to be in working condition are:
Washing machine
Dryer
Dishwasher
Refrigerator
Stove
Microwave
Garbage compactor/disposal
The appraiser will note which appliances are staying with the home and which, if any, are being removed after the sale.
Cooling and Heating System
The Heating, Ventilation, and Air Conditioning (HVAC) system needs to be functioning correctly to ensure the home is comfortable. Every room should have a heating source that is commonly available in the area, such as electricity or natural gas.
There are a few exemptions to this rule in places like Hawaii and south Florida.
A home that relies mainly on either a solar-powered heating system or some type of wood-burning device is also typically required to have an alternative heating device that can maintain a minimum of 50 degrees Fahrenheit.
While a space heater can meet the temp requirement, it usually does not qualify as a home’s main source of heat.
According to FHA guidelines, a central air conditioning system is not mandatory. However, if one is installed, it must be operational. The appraiser will examine the system and document any issues in the appraisal report.
Drainage
Water has the potential to inflict significant harm on a residence in various forms. Proper drainage is a key strategy to mitigate water-related issues. An effective approach is to manage drainage from the roof by ensuring the presence of a suitable gutter system equipped with downspouts that direct water away from the structure, particularly the foundation.
The grading of the yard can also play a part in diverting water away from or around the foundation of the home.
If a draining problem is present either from the roof or from the contour of the yard, it will be noted in the appraisal and will need to be remedied before the loan can close.
Foundation
The appraiser will thoroughly inspect the home's foundation to ensure there are no existing issues or that postponed maintenance won't affect it. Certain foundation problems may be identified during the appraisal and can be addressed to proceed with the FHA loan program. However, issues like improper alignment of the home on the foundation could lead to the cancellation of the loan application.
Roof
Must have 2 years of remaining life
Unobservable roof can be reported on by examining attic and ceilings for leakage
Plumbing System
A recurring theme is to make sure water is not causing any type of problem to a home. This also includes the plumbing system for the home. The appraiser will make sure that there is an adequate supply of fresh water, both hot and cold, in the kitchen as well as all bathrooms.
The water needs to drain correctly in all areas, including the kitchen sink, bathroom sinks, toilets, and showers/tubs. There needs to be no evidence of leaks in any of these areas as well.
The plumbing system inspection will also include checking the water heater. It is important for the water heater to have a sufficient amount of clean water, effectively heat the water, and not exhibit any leaks or damages. Additionally, the water heater must be equipped with a temperature and pressure relief valve along with proper piping to safely redirect steam or hot water, and it should be securely fastened (double strapped) and elevated to meet earthquake safety standards in regions like California.
Sump pumps may be hard-wired or use factory cord for power.
Swimming pools must comply with local ordinances. The presence of algae typically does not require cleaning if there is no evidence of other contamination. With this being an appraiser's call, it is recommended the pool be clean and operational at the time of the appraiser's inspection to reduce the risk of appraisal repair conditions. The pool must be operational to contribute to value.
Smoke and Carbon monoxide detectors
Must be present, operational and installed per code.
Lead-Based Paint
Homes built before 1978: No chipped or peeling paint on interior or exterior of home and/or structures and improvements.
Homes built after 1978: Exterior defective paint that exposes subsurface must be repaired
Termite, pest and dry rot issues
FHA does not require a lender to obtain and review a pest inspection and clearance--even when listed as a contingency in the contract--unless the appraiser notes a need for one. However, please keep in mind some lenders will automatically require the pest and clearance when listed as a contingency in the sales contract.
The appraiser will inspect the foundation, attic, and walls for any evidence of termite infestation. Additionally, decks, porches, and outbuildings that contribute to the property's value must be free from pest and dry rot damage.
Should the appraiser have concerns about termites, a licensed pest control company may need to conduct a thorough inspection to evaluate the extent of the infestation and develop a strategy for eradicating the insects. This usually involves addressing any section 1 items identified in the pest report.
Access to Property
Appraiser must note whether there is safe pedestrian access and Adequate Vehicular Access to the site and analyze any effect on value or marketability.
Appraiser must ask if a maintenance agreement exists and comment on the condition of the private road or lane.
Appraiser must report evidence of a permanent easement.
Other
Handrails do not need to be present if their absence doesn't pose a safety threat, however most appraisers will list this as needing correction if there are 3 steps or more.
Well and Septic system present
Minimum Distance Requirement for Wells from Property Line and Sources of Pollution for Homes to be Eligible for FHA Financing.
Listed below are the minimum acceptable distances between wells and septic tanks and other sources of pollution. If the local or State health authority requires greater distances, then the property must comply with the local or State requirements.
Distance for the well head from source of pollution (Pollution Source; Minimum Horizontal Distance)
Property Line: 10 feet
Septic Tank: 50 feet
Absorption Field: 100 feet (may be reduced to 75 feet if allowed by local authority)
Requires Well Water Testing
New Construction
Appraiser reports deficiencies
Water is reported/known to be unsafe.
Distance between the well and septic system is less than 100 feet
the water supply relies upon a water purification system due to the presence of contaminates;
corrosion of pipes (plumbing);
areas of intensive agricultural uses within one quarter mile;
coal mining or gas drilling operations within one quarter mile;
a dump, junkyard, landfill, factory, gas station, or dry-cleaning operation within one quarter mile; or
an unusually objectionable taste, smell, or appearance of well water.
All testing must be performed by a disinterested third party. This includes the collection and transport of the water sample collected at the water supply source. The sample must be collected and tested by the local health authority, a commercial testing laboratory, a licensed sanitary engineer, or other party that is acceptable to the local health authority. At no time will the Borrower/owner or other Interested Party collect and/or transport the sample.
Site hazards and nuisances
Operating or proposed oil or gas well site boundary may not be within 75 feet of dwelling.
Property line cannot be located within 300 feet of an above ground or subsurface stationary storage tank with a capacity of 1,000 gallons or more of flammable or explosive material.
Evidence of land subsidence or sinkholes requires geologic inspection.
Abandoned oil or gas wells require letter stating abandonment was done in a permanent safe matter.
Abandoned wells emitting hydrogen sulfide are subject to safety clearance by petroleum engineer.
Slush pits are not acceptable. All unstable and toxic materials must be removed, and site made safe.
Dwelling located within high voltage electric line easement requires certification of safety from utility company or regulatory agency. High voltage lines may not pass over dwelling or structures. Residential service drop line may not pass over any pool, spa or water feature.
Methamphetamine contamination requires certification for safe habitation.
Smoke, fumes, offensive or noxious odors must not threaten occupants or marketability.