Appraisal Problems: Reasons Why FHA Loans Fall Through Before Closing

This is the first in a series of articles that will cover some of the most common reasons why FHA loans fall through prior to closing. Many borrowers sail through the FHA review process with no issues whatsoever, while others encounter roadblocks along the way. So it’s important to know what those obstacles are, and what you can do to avoid them.

Today, we will talk about the home appraisal that is required for most FHA loans. Property issues identified during the appraisal process are one of the reasons why FHA loans fall through before closing. Here’s what you should know about it.

What Is an FHA Home Appraisal?

Definition: A home appraisal is an evaluation of a residential property performed by a trained professional, with the goal of determining its market value.

In other words, it’s where an appraiser looks at a house to determine how much it’s worth in the current real estate market. Appraisals are almost always required when a mortgage loan is being used to finance a purchase. This is true for both FHA and conventional home loans.

But there is a key distinction between appraisals conducted for FHA loans and regular mortgages.

With an FHA appraisal, the appraiser will assess the property to determine its market value – just like he would with any other type of mortgage loan. But he will go a step further by reviewing the overall condition of the property, to make sure it meets the minimum requirements set forth by HUD.

So in a sense, the HUD-approved appraiser wear two hats instead of one. He is responsible for giving an opinion on the home’s value. But he must also go through an appraisal checklist to make sure the property meets all requirements for this particular loan program.

FHA appraisals are generally valid for 120 days, but they can be extended in some cases. They are required for most Federal Housing Administration home loans. But there are some situations where it might not be required.

According to HUD Handbook 4000.1, “a statement of appraised value is not required in connection with”…

  • HUD REO (foreclosure) home sales
  • FHA’s 203(k) construction mortgage loan program
  • Sales in which the seller is Fannie Mae, Freddie Mac, the VA or USDA
  • And a few other scenarios

But in a typical real estate transaction where an FHA loan is being used to buy a house, an appraisal is almost always required.

Why the Loan Might Fall Through

There is a long list of property requirements for homes that are going to be financed with an FHA loan. They start around page 485 of HUD’s Single Family Housing Policy Handbook, and they go on for many pages. (So feel free to read through it if you suffer from insomnia!)

Here’s an overview of appraisal guidelines.

Many of the potential problems or issues that might be flagged by an FHA-approved appraiser can be fixed in order to keep the transaction moving forward. For example, a common issue identified during FHA appraisals is a stairwell that lacks a handrail.But it’s also something that can be easily fixed, as long as the homeowner is willing to do so.

Other issues might be more permanent in nature, and therefore harder to remedy. And this is where the home appraisal could cause the FHA loan to fall through prior to closing.

Bedroom windows are a good example of this. For safety reasons, HUD generally requires the home being purchased to have windows in each bedroom that would allow egress (in case of fire). If a bedroom lacks windows for whatever reason, it might cause the FHA home loan fall through. This is not something that could be easily fixed, like peeling paint or a missing handrail.

Closing Thoughts: It’s Really Not that Strict

So the home appraisal is one of several things that could make an FHA loan fall through prior to closing. But these kinds of scenarios are generally the exception rather than the rule. If a house is in decent condition and is generally livable, the home appraiser probably won’t flag any issues. Or at least, no major issues that might cause the loan to fall through.

Bottom line: You shouldn’t leave this article thinking that the FHA appraisal process is overly strict or rigid. It’s not. It’s a thorough evaluation of the home, but it mostly focuses on things that affect the health and safety of the occupant. And those are things you would want to know about anyway, as a home buyer.