Buying or selling a home is more than just a transaction. It involves many steps, from listing to closing, and each one can be a source of frustration, especially if either party is unclear about the purpose or unsure about what to expect.
The appraisal is just one of those anxiety-inducing steps. By understanding the process, including the difference between appraisals for FHA funding and conventional loans, you can reduce some of the stress that comes with it.
Simply put, a conventional appraisal is a uniform way to determine a home’s value. An appraiser will review the property being purchased, and compare it to similar properties that have recently sold in the same area. Price adjustments based on differences in size, condition or features will be used to arrive at a value for the home.
If the market value is the same or more than the selling price, the process can move forward. If market value is less, a reduction in the sales price or larger down payment will likely be needed to close the sale.
One of the simplest ways to avoid surprises during the appraisal process is to do the appropriate research before making an offer or listing your home for sale. Work with a real estate agent familiar with your market to make sure the sales price is supported by past transactions. By proactively taking the same approach as the lender, you can be confident the deal will withstand an independent appraisal.
Since an FHA loan comes with the protection of federal insurance, an FHA appraisal will go beyond just the market value of the property. In addition to completing a traditional appraisal, FHA appraisers must also verify that the home meets minimum standards for health and safety.
Utilities or furnaces that don’t work, peeling paint in older homes, loose stair railings, and even a lack of smoke and carbon monoxide detectors will need to be remedied before an FHA loan can be approved. In many cases, these are problems that the buyer would want to be repaired prior to closing, regardless of the appraisal process. However, if you’re shopping for a fixer upper, an FHA loan may not be the right route for you.
Ultimately, the loan used to purchase the home will determine whether your transaction is subject to an FHA or conventional appraisal. Your loan originator will help you determine the best option, guiding you to the best value.