The FHA is known for their tough requirements regarding a property’s condition. In fact, many sellers avoid buyers with FHA financing because they are afraid of what the FHA will require. Many people believe it is because of a required FHA home inspection. However, it’s not.
The FHA does not require you to get an inspection. What they do require, as do most other loan programs, is an appraisal. There is a major difference, which we will discuss below.
The FHA Appraisal
The FHA appraisal is slightly different from other program’s appraisals. It does the basic job of figuring out how much the home is worth. That much is the same for many loan programs. Otherwise, how would the lender know how much they could lend you? Remember, the home is their collateral. If it doesn’t appraise for at least the amount of the loan, the bank could end up in hot water.
What’s different about the FHA appraisal is the ‘inspection’ part of it. This inspection does not hold a candle to the inspection you can pay for separately from a home inspector. This is just the FHA approved appraiser making sure the home meets the FHA requirements. Basically, the FHA wants to know that the home is safe, secure, and sound.
The appraiser must go through the home and make sure there are no physical issues that would make the home unlivable. Cosmetic issues are not a problem and neither are normal wear and tear issues, unless they affect the livability of the home.
For example, frayed and exposed wires would affect the safety of the home. This would not pass an FHA appraisal. But something like worn out countertops, while not pretty, would not affect the livability of the home. The appraiser looks for ‘surface type’ issues and reports them if necessary.
The Home Inspection
A home inspection takes this on a completely different level. The inspector is not affiliated with the FHA. He works strictly for you – the borrower. He goes through every nook and cranny of the home to figure out what might be wrong with it.
Expect him to report back little cosmetic issues as well as major issues that could affect your purchase decision. The inspector’s job is to make sure you are completely aware of the condition of the home so you know if you want to buy it or not. If there are major issues that you can’t afford to fix or just don’t want to fix, you may have the right to back out of the contract.
What Lenders Require
Basically, the appraiser is strictly for the lender’s purpose and the inspection is for the borrower. This doesn’t mean you can’t use the appraisal to your advantage. If the appraised value doesn’t come back as high as the seller claimed it would, you may want to change your offer or rescind it completely.
Lenders cannot write an FHA loan without an appraisal. The only exception is if you already have an FHA loan on the property and you want to refinance it. If you qualify, you may be able to use the FHA Streamline Program which does not require an appraisal or verification of your credit or income.
Lenders can, however, write an FHA loan without an inspection. They may highly recommend that you order a home inspection, but they won’t require you to do so. You do this at your own risk. Your attorney will likely tell you that with an inspection contingency in your contract, you can back out of the purchase if you don’t like the condition of the home. This in and of itself may make it worth it to pay for the inspection.
You have the choice of which home inspector you use for your home inspection. It’s your cost and your report – you call the shots. It makes sense to pay for one in order to protect your very large investment you are about to make!