I am asked by borrowers and realtors all the time about what exactly FHA appraisers are looking for when they do their inspection. So I took the 14 page FHA appraisal inspection guideline and paired it down into something readable. This is an edited version and not all inclusive, but it highlights the issues that most often cause the appraiser to mark an appraisal “subject to completion” which requires the borrower to pay for the appraiser to go back out and ensure the listed repairs are completed. I used red text for the items that tend to create the most “subject to” appraisals.
The FHA guidelines for property analysis include specific requirements to which appraisers must adhere for the appraisal to denote any deficiencies in the subject property and protect HUD’s interest in that property:
3-1 APPRAISAL REQUIREMENTS
o The appraiser must make a complete visual inspection of the subject property – interior and exterior
3-2 ANALYSIS OF SITE
B. SUITABILITY OF SOIL
C. OFF-SITE IMPROVEMENTS
D. EASEMENTS, RESTRICTIONS OR ENCROACHMENTS
As a general rule, an encroachment will cause a property to be ineligible for FHA mortgage insurance. However, there are exceptions to this rule.
3-3 ANALYSIS OF PHYSICAL IMPROVEMENTS
A. GROSS LIVING AREA
B. BASEMENT BEDROOMS, BASEMENT APARTMENTS
As a rule, basement space does not count as habitable space. If the bedroom does not have proper light and ventilation, the room cannot be included in the gross living area. The following requirements apply to the valuation of below-grade rooms:
o The windowsill may not be higher than 44 inches from the floor.
o The windowsill must have a net clear opening (width x height) of at least 24 inches by 36 inches.
o The window should be at ground level; however, compensating factors may allow less.
In all cases, use reasonable care and judgment. If these standards are not substantially met, the basement area cannot be counted as habitable space.
D. CONFORMITY OF PROPERTY TO NEIGHBORHOOD
3-4 REMAINING ECONOMIC LIFE OF BUILDING IMPROVEMENTS
A. ECONOMIC LIFE VS. PHYSICAL LIFE
B. ESTIMATION OF REMAINING ECONOMIC LIFE
C. END OF USEFUL LIFE OF BUILDING IMPROVEMENTS
3-5 CODE ENFORCEMENT FOR EXISTING PROPERTIES
3-6 GENERAL ACCEPTABILITY CRITERIA FOR FHA-INSURED MORTGAGES
These criteria define standards for existing properties to be eligible for FHA mortgage insurance. The appraiser is the on-site representative for the lender and provides preliminary verification that these standards have been met. The following guidelines are HUD’s General Acceptability Criteria for existing properties. They provide general guidance for determining the property’s eligibility for FHA mortgage insurance.
A. GENERAL ACCEPTABILITY CRITERIA
These minimum requirements for existing housing apply to existing buildings and to the sites on which they are
1. Subject Property
The subject property must be adequately identified as a single, marketable real estate entity.
The property must be free of all known hazards and adverse conditions that:
o may affect the health and safety of the occupants
o may affect the structural soundness of the improvements
o may impair the customary use and enjoyment of the property These hazards include toxic chemicals, radioactive materials, other pollution, hazardous activities, potential damage from soil or other differential ground movements, ground water, inadequate surface drainage, flood, erosion, excessive noise and other hazards on or off site.
3. Soil Contamination
a. Septic and Sewage
If a septic system is part of the subject property, the appraiser must determine whether the area is free of conditions that adversely affect the operation of the system.
b. Other Soil Contaminants
c. Underground Storage Tanks
The site must be graded to provide positive drainage away from the perimeter walls of the dwelling and to prevent standing water on the site. Signs of inadequate draining include standing water proximate to the structure and no mitigation measures such as gutters or downspouts.
5. Water Supply And Sewage Systems
Each living unit must contain the following:
o domestic hot water
o a continuing and sufficient supply of potable water under adequate pressure and of appropriate quality for all household uses o sanitary facilities and a safe method of sewage disposal. Connection must be made to a public water/sewer system or a community water/sewer system.
o Individual Water Supply and Sewage Disposal Systems
If water and sewer systems are not connected to public systems, the water well and/or septic system must meet the requirements of the local health authority with jurisdiction. If the local authority does not have specific requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) will apply.
o Each living unit must be provided with a sewage disposal system that is adequate to dispose of all domestic wastes and does not create a nuisance or in any way endanger the public health.
6. Wood Structural Components: Termites
FHA requires maximum assurances that a home is free of any infestation. A pest inspection is always required for:
o any structure that is ground level
o any structure where the wood touches ground
Structures in a geographic area with no active termite infestation may not require a pest inspection. However, the appraiser must always note:
o any infestation
o any damage resulting from previous infestation
o whether damage from infestation has been repaired or is in need of repair
Each property must be provided with safe and adequate pedestrian and vehicular access from a public or private street. Private streets must be protected by permanent recorded easements and have joint maintenance agreements or be owned and maintained by a HOA.
8. Defective Conditions
A property with defective conditions is unacceptable until the defects or conditions have been remedied and
the probability of further damage eliminated. Defective conditions include:
o defective construction
o poor workmanship
o evidence of continuing settlement
o excessive dampness
o other readily observable conditions that impair the safety, sanitation or structural soundness of the dwelling
Natural ventilation of structural space – such as attics and crawl spaces – must be provided to reduce the effect of excess heat and moisture that are conducive to decay and deterioration of the structure. All attics must have ventilation to allow moisture and excessive heat to escape. The appraiser must check the attic areas to determine whether the ventilation is adequate.
All foundations must be adequate to withstand all normal loads imposed. Stone and brick foundations are acceptable if they are in good condition.
11. Crawl Space
To ensure against conditions that could cause the property to deteriorate and seriously affect the marketability of the property, it is required that:
o There must be adequate access to the crawl space; the appraiser must be able to access the crawl space for inspection. Access is defined as ability to visually examine all areas the crawl space. Specifically, the minimum distance is 18 inches.
o The floor joists must be sufficiently above ground level to provide access for maintaining and repairing ductwork and plumbing.
o The crawl space must be clear of all debris and trash and must be properly vented.
o The crawl space must not be excessively damp and must not have any water ponding.
The covering must prevent moisture from entering and must provide reasonable future utility, durability and economy of maintenance. When re-roofing is needed for a defective roof that has three layers of shingles, all old shingles must be removed before re-roofing. Flat roofs typically have shorter life spans and therefore require inspection.
13. Mechanical Systems
These are the requirements for mechanical systems:
o must be safe to operate
o must be protected from destructive elements
o must have reasonable future utility, durability and economy
o must have adequate capacity and quality
Heating must be adequate for healthful and comfortable living conditions:
o Dwellings that use wood-burning stoves or solar systems as a primary heat source must have permanently installed conventional heating systems that can maintain a temperature of at least 50 degrees F. in areas containing plumbing systems.
o Properties with electric heating sources must have an acceptable electric service that meets the general requirements of the local municipal standards.
o All water heaters must have a non-adjustable temperature and pressure-relief valve. If the water heater is in the garage, it must comply with local building codes.
o All non-conventional heating systems – space heaters and others – must comply with local jurisdictional guidelines.
Electricity must be available for lighting and for equipment used in the living unit.
16. Other Health And Safety Deficiencies
The appraiser must note and make a repair requirement for any health or safety deficiencies as they relate to
the subject property, including:
o broken windows, doors or steps
o inadequate or blocked doors
o steps without a handrail
The appraiser must operate a representative number of windows, interior doors and all exterior and garage
doors, as well as verify that the electric garage door operator will reverse or stop when met with resistance during closing.
17. Lead-Based Paint And Other Hazards
If the home was built before 1978, the appraiser should note the condition and location of all defective paint in the home. Inspect all interior and exterior surfaces – wars, stairs, deck porch, railing, windows and doors – for defective paint (chipping, flaking or peeling). Exterior surfaces include those surfaces on fences, detached garages, storage sheds and other outbuildings and appurtenant structures.
B. OTHER CRITERIA
1. Party Or Lot Line Wall
There must be adequate space based upon market acceptability between buildings to permit maintenance of the exterior walls for detached homes.
2. Service And Facilities
Trespass. Each living unit must have the capacity to be maintained individually without trespassing on adjoining properties.
Utilities. Utilities must be independent for each living unit except that common services – water, sewer, gas and electricity – may be provided for living units under a single mortgage or ownership.
o Each unit must have separate utility service shutoffs.
o Each unit must have individual meters.
3. Bedroom Egress
All bedrooms must have adequate egress to the exterior of the home. If an enclosed patio (solid walls) covers the bedroom window, it is possible that the bedroom won’t qualify as a habitable bedroom. Security bars are acceptable if they comply with local fire codes. Occupants of a bedroom must be able to get outside the home if there is a fire.
C. CONDITIONS NOT REQUIRING REPAIRS
Conditions that do not ordinarily require repair include any surface treatment, beautification or adornment not required for the preservation of the property.
These are some examples:
o A wood floor’s finish that has worn off to expose the bare wood must be sanded and refinished. However, a wood floor that has darkened with age but has an acceptable finish does not need polishing or refinishing.
o Peeling interior paint and broken or seriously cracked plaster or sheetrock require repair and repainting, but
paint that is adequate though not fresh does not need to be redone.
o Missing shrubbery or dead grass on an existing property does not need to be replaced.
o Cleaning or removing carpets is required only when they are so badly soiled that they affect the livability and/or marketability of the property.
o Installing paved driveways or aprons should not be required if there is an otherwise acceptable surface.
o Installing curbs, gutters or partial street paving is not required unless assessment for the same is imminent.
o Complete replacement of tile floors is not necessary if some tiles do not match, etc.