How Do The FHA Minimum Property Standards Work?
To ensure a property meets minimum property standards set by the FHA, an appraisal must be done. The appraiser uses a dedicated handbook to make sure the property meets the necessary standards, while also determining the home’s market value.
To see the full list of standards, you can access the handbook on the official website of the U.S. Department of Housing and Urban Development (HUD).
Appraisal Process
An FHA appraisal is one performed by an FHA-approved appraiser. There are two main components to the process:
1. Home Adherence To The Minimum Property Standards
In the first step, the appraiser ensures that the home meets the FHA’s minimum property standards. Specifically, this is where the appraiser will do the checks mentioned above for safety, security and soundness.
If the property doesn’t meet the minimum standards, it will be noted in the appraisal report, and the issues will need to be addressed before the appraisal and purchasing of the home can move forward.
2. Home Value Is Calculated
Because the home serves as collateral that can be sold if you default on your mortgage, your lender can’t give you more than the property is worth minus your down payment or any equity being left in the home.
To facilitate this lending structure, appraisers evaluate your home and look for comparable properties that have recently sold. A comparable for a two-bedroom ranch is likely to be another two-bedroom ranch with similar square footage.
Appraisal Form
Each FHA appraisal is based on a form called the Uniform Residential Appraisal Report. It asks the appraiser to fill out some basic information on the property and the state of the neighborhood surrounding it. Beyond that, it gets into the physical condition of the property, as well as what features the property has, including those that might be unique (for example, solar panels or a swimming pool).
On the second and third pages, the appraiser is asked to look at up to three comparable sales in the area and make adjustments to the property value, either positively or negatively, based on how the subject of the appraisal compares against these other properties. From this, the appraiser gives an opinion of the value of the property, which is used for the purpose of the mortgage.
Property Types
Although different forms and idiosyncrasies go along with each property, standards adherence and home valuations are present for FHA appraisals, encompassing all the following property types:
- Single-family homes: This is just the standard Uniform Residential Appraisal Report.
- Multifamily units: If there are two to four units, this is based on Fannie Mae Form 1025 or Freddie Mac Form 72.
- Manufactured houses: These are based on Fannie Mae Form 1004C or Freddie Mac Form 70B.
- Condominiums: Condo appraisals are based on Fannie Mae Form 1073 and Freddie Mac Form 465.
