This is part of an ongoing series in which we answer frequently asked questions relating to FHA home loans. Today’s question comes to us from a reader in San Diego. Elizabeth asks:
“How does the FHA appraiser determine the market value of the house I’m buying? What steps are involved in the process of determining how much a home is worth?”
Regardless of whether you are using an FHA or a conventional home loan, the basic steps in the appraisal process are the same. The appraiser will look at recent and comparable sales in the same area where the home being purchased is located. He would use this as a basis for determining the market value of the “subject” property.
He will also visit the house in person to see how it compares to recent sales in the area. He might make “adjustments,” upward or downward, based on the features and condition of the subject property as well as the comparable homes.
FHA Appraisal Terminology
Before we go any further, we should cover some of the terminology being used here.
- Subject property: This is the house that is being purchased with an FHA loan. To determine market value, the FHA appraiser will compare the subject property to comparable sales in the area (see next definition).
- Comparable properties: These are similar homes that have sold in the same area as the one that is being purchased. The appraiser uses this data to measure the current market value of the subject property (i.e., the house being purchased).
When it comes to using comparable sales, the appraiser will look for the most recent data available. Recent sales are a better indicator of current market conditions in home values, compared to those that occurred a long time ago.
With that being said, HUD and the Federal Housing Administration do allow appraisers to look at comparable sales that have occurred within the last year.
In an instructional manual entitled “FHA appraisal essentials,” the Department of Housing and Urban Development offers the following definition:
“Comparable sales: number of comparable sales that occurred within the 12 month period preceding the effect of date of the appraisal, and within the subject neighborhood, together with the price range.”
The above-mentioned document goes on to define comparable listings, which refers to homes that are currently listed for sale but have not yet been sold. To determine the market value of a house being purchased, and FHA appraiser can also look at active real estate listings in the target area.
So the appraiser is looking at current listings and recent sales. This provides a basis for determining how much the subject property is worth.
How FHA Appraisers Determine Value
This is the start of the FHA appraisal process, but it certainly doesn’t end there. To determine the market value of the home you are buying, the FHA appraiser will also visit the house in person. He will evaluate it against the comparable sales we talked about earlier, to see how the home “stacks up” to recent sales and current real estate listings.
Home appraisers are trained to make “adjustments” to a house based on any value-adding features it might have. For example, if the subject property is similar to recent sales in most respects – but it has a fully upgraded kitchen – he might adjust the value upward.
On the other hand, FHA appraisers can also adjust market value downward if the home lacks certain features that the comparable sales had in their favor.
Sometimes the house appraises at or above the mutually agreed-upon purchase price, while in other cases it might come in below the purchase price.
There’s a Basic Property Inspection as Well
In addition to determining the market value of the home, FHA home appraisers are responsible for evaluating the overall condition of the property.
But don’t confuse this with a full home inspection. The two procedures are similar, but FHA appraisers typically do not go into the same depth and detail as a regular home inspector would. They’ll conduct a very basic inspection of the property to make sure it meets all requirements set forth by HUD.
So in this regard, the FHA appraiser wears two hats:
- He must determine the market value of the home being purchased, as explained above.
- He must also evaluate the overall condition of the house to make sure it meets HUD guidelines and requirements.
So that’s a quick overview that explains how FHA appraisers determine the current market value of a home that is being purchased. If you would like to learn more about this mortgage program, click on “learn” in the main menu above.