FHA Appraisal Guidelines for 2024: A Guide for Home Buyers

FHA appraisal guidelines tend to generate a lot of questions and confusion from borrowers. And it’s easy to understand why. The section of the official FHA handbook that covers home appraisal requirements goes on for nearly 100 pages.

We created this guide to provide a simplified version of those requirements, and to help home buyers better understand the appraisal process for FHA loans.

Here are five things you should know right off the bat:

1. FHA appraisals serve two purposes. They determine the home’s current market value as well as its overall condition.
2. There are three possible outcomes from the appraisal: insurable, insurable with repairs, or uninsurable.
3. The FHA limits required repairs to issues relating to structural soundness, marketability, or occupant health and safety.
4. Depending on the severity, repairs can either be completed before closing or after the closing as determined by the underwriter.
5. Appraisers will sometimes re-inspect the home after repairs have been completed, especially for significant issues.

Purpose of the FHA Home Appraisal

Home appraisals for government-backed programs like FHA and VA work differently from the appraisals used for conventional mortgage loans.

With an FHA loan, the home appraisal serves two primary purposes. The appraiser will review the property being purchased in order to estimate the current market value.

The appraiser will decide what the home is worth by considering local real estate market conditions and the specific features of the property itself.

That’s the first part. The second part involves the property’s condition.

With an FHA appraisal, the appraiser must also inspect the home to make sure it meets the Minimum Property Requirements (MPRs) and other guidelines established by HUD.

This is different from a conventional home loan.

When a conventional mortgage loan is being used, the appraiser primarily focuses on establishing the fair market value of the house. He or she will only evaluate the condition of the home as needed to determine the appraised value.

The official appraisal guidelines for FHA loans provide instructions for both of these goals. The HUD handbook explains how the home appraiser should estimate the market value (see below), and also outlines the Minimum Property Requirements mentioned above.

How the Appraiser Determines Market Value

Key point: FHA-approved appraisers must determine the market value of the home being purchased to ensure the loan amount does not exceed the estimated property value.

A complete list of FHA appraisal guidelines and instructions can be found in HUD Handbook 4000.1, also known as the Single Family Housing Policy Handbook. HUD updates this handbook anytime they publish new requirements or guidelines relating to the program.

The appraisal guidelines can be found in section II-D of this handbook, which is entitled “Appraiser and Property Requirements for Title II Forward and Reverse Mortgages.”

This section of the guide also tells home appraisers how to determine the market value of a particular property. HUD defines the market value as:

“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”

The Federal Housing Administration insures lenders against losses resulting from borrower default. So they need to ensure that the home is worth the price the buyer has agreed to pay for it. The appraisal helps them accomplish this by estimating the market value.

Before starting the appraisal process, the appraiser must obtain:

• A copy of the signed purchase agreement / sales contract
• The land lease document (if applicable)
• Property surveys or legal descriptions
• Any other legal documents included within the loan file
• Mortgage company point of contact for reporting noncompliance issues

FHA appraisals must meet the guidelines outlined in the Uniform Standards of Professional Appraisal Practice (USPAP), which covers everything from educational requirements to performance standards.

Minimum Property Requirements

Key point: FHA guidelines state that the home appraiser must evaluate the property to ensure that it meets a specific set or property standards relating to safety and habitability.

(We’ve created a separate guide that explains the Minimum Property Requirements for homes purchased through the FHA loan program. This section provides a shorter summary.)

The appraisal guidelines and property standards are designed to safeguard the health and safety of the home buyer and future occupant, and to reduce risk for both the lender and the FHA.

Some people believe that FHA home appraisals are unnecessarily strict or hard to pass. But that’s generally not true. They mainly focus on basic health and safety issues with a common-sense approach and reasonable flexibility.

The roof should be intact. The foundation should be stable. The electrical and plumbing systems should work. That’s the sort of thing you’ll find in the official appraisal guidelines.

The appraiser will also check to see if there are any “defective conditions” that need to be fixed before the loan can be approved. HUD’s definition of defective conditions includes:

• Defective construction
• Evidence of continuing settlement
• Excessive dampness or leakage
• Decay in the foundation, roof or structure
• Termites / wood-destroying insects
• Environmental hazards

In short, the FHA appraiser is looking for anything that might interfere with (A) homeowner safety or (B) the home’s ability to be used as collateral.

Three Possible Outcomes from the Appraisal

Key point: If the appraiser identifies repair items, it’s probably not a dealbreaker. The transaction could still proceed, once the required repairs have been completed.

So, the home appraiser evaluates the property using the official FHA guidelines. He or she estimates the market value of the home and inspects it to ensure that it complies with the Minimum Property Requirements mentioned earlier.

The outcome from this process could go one of three ways:

Green light. If the appraiser decides that the home meets the minimum property requirements without needing repairs, he/she will label the property as “insurable.” The appraisal might also note minor issues that don’t require immediate repair but should be addressed by the homeowner at some point. No further action is needed, and the deal can move forward. 

Yellow light. If the appraiser identifies one or more defective items that need to be repaired, the issue will be noted on the appraisal form. Depending on the severity of the item (i.e., cosmetic vs. safety issue), the repairs might need to be completed before closing or afterward.

Red light: If the appraiser identifies serious defects in the property, or issues that would be hard to fix like a bedroom with no secondary egress, the property will be determined to be “uninsurable.” In this case, the FHA loan probably will not be approved.

How the FHA Defines Required Repairs

Home buyers should understand that the FHA appraiser is not “out to get them,” or to make the process more complicated than it needs to be. Their goal is to ensure that the home is safe and structurally sound.

In fact, the official FHA guidelines for home appraisals provide clear instruction on this subject. The HUD handbook tells appraisers to identify required repairs only if they are necessary to:

• maintain the safety, security and soundness of the home
• preserve the continued marketability of the home
• protect the health and safety of the occupants

A knowledgeable appraiser who is familiar with FHA appraisal requirements will only flag an item for repair if it meets one or more of the standards outlined above.

Cosmetic issues, minor repairs, and general “wear and tear” are usually not flagged.

Making Repairs to Keep the Deal on Track

So let’s assume the appraiser identifies one or more defects that need to be repaired. Here’s how the process usually unfolds.

1. Appraiser identifies required repairs.

The appraiser will note the necessary repairs in the appraisal report, specifying what needs to be fixed to meet FHA’s minimum property standards. This will likely include an “estimated cost to cure” and possibly some descriptive photos as well.

2. Underwriter reviews the repair list.

The mortgage lender’s underwriter will review the appraisal report and the required repairs. They will determine whether the repairs are mandatory before closing, or if they can be addressed after closing.

3. Repair negotiations between buyer and seller.

If the repairs have to be completed before closing, the buyer and seller can negotiate over who’s going to pay for it. It could be the seller, the buyer, or a combination of both.

4. Appraiser re-inspects to verify repairs.

Once the necessary repairs have been completed, the appraiser might have to conduct a re-inspection to verify it has been done satisfactorily. This will depend on the mortgage lender’s requirements and the extent of the repairs. Not everything has to be re-inspected.

5. Final loan approval and closing.

When the mortgage underwriter confirms the repairs are complete and meet FHA guidelines, the loan can proceed to final approval and closing.

For minor repairs (e.g., paint touch-ups, minor plumbing fixes), the appraiser might not have to re-inspect the item. In such cases, receipts or photos of the repaired item might be enough to show that the correction has been made.

For more significant repairs, however, a re-inspection is almost always required.

Disclaimer: This article provides an overview of the official FHA appraisal requirements established by HUD but is not meant to substitute for those guidelines. We have created this guide to help home buyers understand how the process works. The appraisal process can vary from one transaction to the next due to a number of factors. As a result, portions of this guide might not apply to your particular situation.