Basic job of an Appraiser During the Home Purchase
Most of us understand the basic job of an appraiser. An appraiser is hired by the lender as an INDEPENDENT third party to assist in determining fair market value for a property. The lender uses this information to make sure that the asset, the house you are buying, is sufficient collateral for the mortgage on your property. As an example, to make that statement a little
clearer, a bank doesn't want to give you $400,000 for a property that they could only sell for $300,000 if they needed to foreclose. They are just trying to absorb the risk of you not paying, they don't need additional risk that the property needs to appreciate as well. (Now we all know that this process didn't work as well as it might of in the last decade, but there's a lot that goes in to that discussion and we'll sidestep that today.) So, basically, their job is to protect the bank from fraud and protect the banks balance sheet by making sure the assets line up with the loans.
FHA Appraisers Go Deeper
FHA loans are government back loans, and, as such, differ from regular, so called "conventional" loans. Where a conventional loan will allow the buyer to take on certain risks, an FHA appraiser may not allow a buyer to take the same risks. The difference is driven by the amounts that you can borrow. A normal, conventional loan generally asks the borrower to put 20% down. The bank figures if you're putting 20% down, you know what you're doing, so they give you more opportunity to take on risk. With an FHA loan, you can purchase property with as little as 3.5% down, and sometimes less. Now the FHA (remember, it's the Federal Government here) is willing to let you borrow basically all the money for that home, but they need it to be more or less risk free. What they are trying to do is to avoid a situation where a "cash-strapped" borrower (and you must be strapped for cash, since you're not putting 20% down, right?) will go quickly into foreclosure if they get hit with some big-ticket items right after the loan closes. And we can't have that! So they do a check on the following items as well.
Things an FHA appraiser Might Check
- Handrails: They can't have you fall down, break your leg, lose your job, and stop paying.
- Broken Windows: Windows can be a large capital expense. Heating the property can be too, so we need intact, functioning windows.
- Lead Paint: Lead Paint mitigation can get expensive very quickly, so an FHA appraiser will try to do a quick check to make sure the property isn't an lead poising accident waiting to happen. Peeling lead paint is often a big concern.
- The Roof: A roof is probably the most important component of your house- it protects everything else! Replacing one is necessary and expensive, so we can't be doing that right away.
- Heating Systems: No heat means freezing pipes could be around the corner. Burst pipes can and will destroy a home quickly. First comes ice, then comes water, then comes mold, then comes foreclosure. Just about that fast too.
- Termites: Another expensive project that can't be put off (typically). An FHA no-no.
- Septic Systems: Normally, if a septic system has a passed Title V, septic systems are not a problem. But if the home is near a sewer line, FHA may require an upgrade to sewer - even if the existing system is perfectly fine.
There are many other items that they check for as well. But they all fall into similar categories. The home must not need any immediate capital improvements, it must be safe to occupy, and it must be livable.
Challenging FHA appraisals
Challenging an FHA appraisal that doesn't support your purchase price is very difficult. First, you need good evidence that the comparables, or comps, that the appraiser used aren't as good as some other ones that support your price. If the loan was kicked out because the property isn't FHA financeable, you'll need the seller to fix those items (usually very difficult) to the point where the appraiser can drop the objection. It is possible, in certain cases, to be able to alter the final appraisal number, but should be know that most of the time the appraisal is a well done enough where it is difficult to get corrected.
More Great Financing Info!
More Information about FHA Appraisals and HUD
HUD.gov and FHA info
Do Good Things Today! Matt Heisler
*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.