What is the Appraisal?

An appraisal is an “expert” assessment of your home in order to determine its value for the purpose of the loan. An important distinction to remember here is that this valuation is contemporaneous with the loan; it does not mean this is what it would sell for. This is an important distinction, especially with FHA loans that suffer greater scrutiny.

During this process, the appraiser will look at what is deemed to be comparable properties. These would be properties of similar size and design that have sold recently, in close proximity to your home and typically located in the same school district (for densely populated areas). The appraiser will also visit the “subject house”, which is how we will refer to your home, and evaluate it both inside and out. After this inspection the appraiser will write a report to detail their findings. The report will include an estimated value of the home, as well as any required repairs. Repairs, in the case of a reverse mortgage, are ones that bring the house up to minimum FHA standards for living and for safety. The report is forwarded to both FHA and the lender for review and further action. As of October, 2018 ALL reverse mortgage appraisals are subject to a possible second inspection prior to closing if FHA deems it necessary.

How the FHA Process Is Different from a ‘Regular’ Transaction

99% of the reverse mortgage transactions are the FHA-insured HECM. Many people are often surprised to find that this appraisal includes an inspection of the property. This is different from a standard appraisal, where the appraiser mainly wants to know what the house is worth. In our case, the appraiser performs some extra work with the inspection part. If the HUD-approved appraiser flags certain issues – such as peeling paint, loose handrails, or other safety issues – then those issues must be corrected before the loan will be funded. In other words, the transaction will be put on “hold” until the discrepancies are resolved.

At a minimum, the appraiser must complete the following steps:

1. Visually inspect the subject property both inside and out. They must inspect all rooms, crawl space, attics etc.
2. Take photos of the property to be included within the loan file. The photos must show all sides, front and rear of the home, as well as any value-adding improvements such as a pool or patio.
3. Take a photo of each comparable sale transaction that is being used to support the appraisal.
4. Include in the report a street map that shows the location of the property and each comparable sale, or “comp,” used during the valuation, along with an aerial view as well.

These are the minimum steps that must be performed during an FHA home appraisal. Depending on the home and the neighborhood, the appraiser could have to do more and include more information in the report. The appraiser will interview you, the homeowner, for information about the house too.

What Does the Appraiser Look for?

Here are some of the key inspection areas required by HUD:

• HUD’s primary concern is the health and safety of the home owner. Above all, the home must be habitable without any potential hazards to the occupant.
• The lot should be graded in a way that prevents moisture from entering the basement and/or foundation.
• All bedrooms should have egress to the exterior, for reasons of fire safety. A window is sufficient as long as it’s large enough to allow egress. Additionally, if there are safety bars on the windows, them must be of the “quick-release” kind.
• Many homes built before 1978 still contain lead-based paint, which is a potential health hazard. In these homes, the appraiser will check for damaged paint (peeling, chipping, etc.). Such conditions might require remediation before the loan will go through.
• The heating system must be sufficient and year round for the home.
• The roof must be in good shape and have a useful life of at least 3 years.
• The foundation should be in good repair and able to withstand “all normal loads imposed” on it.
• Any other structures on the property, whether adding value or not, must not create any safety issues.

According to the HUD rules, the home “must be free of all known hazards and adverse conditions that may affect the health and safety of the occupants.”

Making Repairs After the Inspection

There’s a common misconception that FHA appraisals are unnecessarily strict, and that any inspection “deficiencies” will end your chances of getting a loan. This is incorrect. Most discrepancies are fully correctable. If they are corrected before the final inspection (when the appraiser follows up on the hit list), the loan can still move forward.