Buying a home is exciting, but there are a few moments in the mortgage process when the excitement can turn into nervous anticipation. The appraisal is one of them.
You may have found the house you love, negotiated a price with the seller, and received your loan preapproval. Then your lender orders an appraisal, and suddenly you are wondering, “What exactly is the appraiser looking for?”
That is a fair question. Both FHA and conventional appraisals are designed to establish a property’s market value. But there is an important distinction between the two. A conventional appraisal is primarily focused on determining value and evaluating the property’s overall condition. An FHA appraisal also determines value, but it places additional emphasis on whether the property meets the Federal Housing Administration’s minimum property requirements for safety, security, and soundness.
For a homebuyer, understanding that difference can make the appraisal process feel a lot less mysterious.
What Is a Home Appraisal?
A home appraisal is an independent opinion of a property’s market value, prepared by a qualified appraiser. Your mortgage lender uses the appraisal to help determine whether the home provides sufficient collateral for the loan.
The appraiser considers things such as the home’s location, size, design, condition, improvements, and recent comparable sales. The goal is to determine the property’s reasonable market value.
If you agree to purchase a home for $400,000 and the appraisal supports a value of $400,000 or more, the transaction can generally proceed from a valuation standpoint.
But suppose the appraisal comes in at $380,000. Now there is a $20,000 gap between the contract price and the appraised value. That does not automatically mean the transaction is dead. Depending on the circumstances and the terms of your purchase contract, the buyer and seller may renegotiate the price, the buyer may bring additional cash to closing, or a reconsideration of value may be appropriate.
The important thing is not to panic. Appraisal issues are problems to work through, not necessarily reasons to walk away.
FHA vs. Conventional Appraisal: The Main Difference
The simplest way to understand the difference is this:
- A conventional appraisal primarily asks, “What is this home worth?”
- An FHA appraisal asks, “What is this home worth, and does it meet FHA’s minimum property requirements?”
That second question is what creates much of the difference.
FHA-insured loans are subject to property standards established by the U.S. Department of Housing and Urban Development (HUD). The FHA appraisal therefore includes additional observations concerning the property’s safety, security, and soundness.
That does not mean every FHA appraisal is dramatically different from a conventional appraisal. In fact, the two have become more similar over the years. Both evaluate market value, comparable sales, property condition, and other characteristics that affect the property’s marketability.
The difference is what happens when the appraiser discovers a condition that could affect the property’s eligibility for the particular loan program.
What Does an FHA Appraiser Look For?
An FHA appraiser still performs a valuation of the property, but the inspection includes additional attention to FHA’s minimum property requirements.
The appraiser may look at items such as:
- Roof condition and remaining useful life
- Foundation and structural components
- Proper drainage around the property
- Functioning utilities and mechanical systems
- Safe access to the property
- Stairs and handrails
- Attic and crawl space access
- Potential safety hazards
- Significant water damage or other environmental concerns
- Defective or peeling paint on homes built before 1978
FHA appraisals can also require the appraiser to observe accessible attic and crawl spaces for deficiencies. Older homes receive particular attention when it comes to deteriorated paint because of the potential presence of lead-based paint.
Here is something buyers sometimes misunderstand: an FHA appraisal is not a home inspection.
The appraiser is not performing the same comprehensive inspection you would receive from a professional home inspector. In fact, I strongly recommend that buyers get their own independent home inspection, regardless of whether they are using FHA or conventional financing.
Think of the appraisal as protecting the lender’s financial interest, while the home inspection is primarily about protecting you as the buyer.
What Does a Conventional Appraiser Look For?
A conventional appraisal also considers the property’s overall condition, but it generally does not apply the same FHA-specific minimum property requirements.
The appraiser evaluates the home’s characteristics and condition and compares the property with recent comparable sales. Factors can include the home’s size, location, age, design, quality, renovations, condition, and features.
The appraiser may identify significant problems involving the roof, foundation, utilities, or structural integrity. Health and safety concerns can also become an issue.
The key difference is that a conventional loan can sometimes provide more flexibility when a property has cosmetic or minor condition issues. A cracked tile, dated kitchen, worn carpet, or an older bathroom does not necessarily prevent a conventional loan from closing.
That flexibility can be important when you’re purchasing an older home or a property that needs some cosmetic updating.
Why FHA Appraisals Can Lead to Required Repairs
This is where FHA financing sometimes gets its reputation for being “stricter.”
If an FHA appraiser identifies a condition that does not meet applicable FHA requirements, the appraisal may be completed subject to repairs or further inspection. The required work may need to be completed and documented before the mortgage can close. A final inspection or completion report may also be necessary.
For example, imagine you fall in love with an older home that has peeling exterior paint.
With conventional financing, the issue may or may not become a condition that must be repaired, depending on the circumstances and applicable lender requirements.
With FHA financing, deteriorated paint on a pre-1978 property may be subject to additional scrutiny due to lead-based paint requirements.
The same principle applies to certain safety or structural concerns. The important thing is to understand that an FHA appraisal does not automatically mean the house will fail. Many issues can be corrected, documented, and cleared before closing.
What Happens If the Appraisal Comes in Low?
A low appraisal can be unsettling, but it does not automatically end your home purchase.
Suppose you agreed to pay $350,000, but the appraisal comes in at $340,000. Your lender generally bases the loan on the lower of the two values, rather than simply accepting the contract price.
At that point, several possibilities may exist. The seller might agree to reduce the price. You might decide to contribute additional funds. The parties could potentially meet somewhere in the middle. In certain circumstances, you may also have the option of requesting a reconsideration of value through the lender. Your purchase contract and local laws can also affect your options.
This is one reason having an experienced real estate agent and knowledgeable loan officer matters. When an appraisal raises concerns, you want professionals who can explain what the report actually means rather than immediately assuming the transaction is over.
FHA vs. Conventional Appraisal: Which Is Better?
Neither appraisal is inherently better.
The appraisal follows the loan program you choose. If you finance your purchase with an FHA loan, the property must satisfy FHA requirements. If you use conventional financing, the appraisal is completed in accordance with the applicable conventional guidelines.
For many buyers, the more important question is not, “Which appraisal is easier?”
It is, “Which mortgage program makes the most sense for my financial situation and the property I want to buy?”
FHA financing can be an excellent option for qualified buyers seeking the flexibility and accessibility the program offers. Conventional financing may make more sense for borrowers with stronger credit, more available funds, or a property that fits particularly well within conventional guidelines.
Your loan officer should help you compare the full picture, including the down payment, mortgage insurance, interest rate, monthly payment, closing costs, credit profile, and the property’s condition.
How Homebuyers Can Prepare for the Appraisal
You cannot control the appraiser’s opinion of value, and you should not try to.
What you can do is make sure the property is accessible and that obvious issues are addressed before the appraisal whenever possible.
If you’re buying an FHA property, pay particular attention to safety and condition concerns. Make sure utilities can be operated, attic and crawl space areas are accessible when applicable, and obvious maintenance problems have been addressed.
Most importantly, don’t confuse an appraisal with an inspection.
The appraisal helps the lender understand the property’s value and, with FHA financing, its compliance with applicable property requirements. A professional home inspection gives you a much deeper understanding of the home’s condition.
The Appraisal Shouldn’t Stand Between You and Homeownership
For a first-time home buyer, the appraisal can sound intimidating. In reality, it is simply one more step designed to make sure the financing and the property make sense together.
FHA and conventional appraisals have more in common than many buyers realize. Both evaluate market value, both consider the property’s condition, and both can identify serious issues that may need attention before a lender will proceed.
The biggest difference is that an FHA appraisal has an additional layer of responsibility because the property must meet FHA’s minimum property requirements.
So, if you’re preparing to buy a home, don’t let the word “appraisal” make you nervous. Ask questions. Understand the loan program you’re using. Have a thorough home inspection. And work with a mortgage professional who can explain the process in plain English when something unexpected appears.
Buying a home is a major financial decision, but you don’t have to navigate every step alone. The right guidance can turn a confusing appraisal report into something much more manageable, making the path to homeownership feel a whole lot clearer.
