Home appraisals involve paperwork and physical property inspections, and buyers should know the Federal Housing Administration is stricter about them for its government-backed loans than are brokers using conventional mortgages.
An appraiser inspecting a property under a conventional mortgage usually takes some measurements and photos inside and outside the home and, after a brief look, leaves, said Bill Burnett, president of the Virginia Association of Mortgage Brokers and of Homestead Mortgage in Lorton.
It’s not that fast for an FHA loan. FHA appraisers do an inspection bordering on what a home inspector would do for potential buyers, Burnett said. FHA loans require appraisers to check electrical systems, look for water stains and do other work that would not be required for a conventional loan purchase.
Burnett said he’s seen appraisers working on FHA purchases use binoculars to see if roof shingles are curling. “It’s to that level,” he said.
While appraisal rules are much tougher with FHA loans, the credit and qualification requirements are less stringent when compared with a conventional mortgage. Homebuyers can get FHA loans with down payments of 3.5 percent, while most private and conventional lenders seek down payments of 10 percent, Burnett said.
The trade-off makes sense, said Frank Donnelly, vice president of the Mortgage Bankers Association of Metropolitan Washington. Part of the FHA mission is helping first-time buyers and low-to-moderate-income buyers, and it is a bad idea to put buyers with lower levels of savings into a home needing major repairs.
Burnett said first-time buyers not only need to be ready for a more stringent process, they also need to know what their rights are, including their options if the appraised value of the property comes in low.
“Today, with values in some areas continuing to fall, they better know about that,” he said.
For conventional and FHA loans, appraisals must be ordered through an independent third party. The cost for appraisals on conventional and FHA loans has increased as much as $100. “It’s greatly slowing down the process,” Burnett said.
Nothing has changed for appraisals on mortgages guaranteed by the Veterans Affairs Department, Burnett said. The VA assigns appraisers to perform the work.
Appraisers have a specific duty: to assign a property a value. Home inspections review the physical condition of the house and are done separately for the buyer’s benefit, Burnett said.
There is no relationship between the type of loan used and the requirements for the home inspection, said John Nelson, owner of the National Property Inspections franchise in Prince William County.
“Lenders rely more on the appraisal and typically do not require the home inspection to be provided at all,” Donnelly said.
The FHA administers several single-family mortgage insurance programs, including 203(k) loans, which are designed for properties that need rehabilitation and repairs. The 203(k) program allows the homebuyer to get one mortgage loan for the purchase and rehabilitation of the property, and the mortgage amount is based on the projected value of the property with the work completed, according to FHA guidelines. Once the rehabilitation work is finished, it must be inspected to meet FHA requirements.
“I haven’t done one of those in a long time,” Burnett said. “I hear they’re getting a little more popular because of all the foreclosed properties.”
