How Often Do FHA Appraisals Come in Low?

When considering a home purchase with Federal Housing Administration (FHA) financing, understanding the role of an FHA appraisal is important. This appraisal establishes the property’s market value and ensures the home meets specific safety, security, and structural soundness standards set by the U.S. Department of Housing and Urban Development (HUD). An FHA appraisal differs from a home inspection, which assesses a home’s overall condition for the buyer. The FHA appraisal focuses on the property’s eligibility for the loan, protecting both the lender and the buyer. A common concern for buyers and sellers is the possibility of the appraisal coming in lower than the agreed-upon sales price.

Understanding Appraisal Frequency

The occurrence of FHA appraisals coming in lower than the sales price is a notable consideration in real estate transactions. While there isn’t a universally cited, fixed percentage for how often this happens, it is a significant enough event to warrant attention from those involved in FHA-backed home purchases.

Industry observations suggest that FHA appraisals are perceived as more stringent compared to conventional loan appraisals. This is primarily due to the FHA’s emphasis on minimum property standards designed to ensure the home is safe, sanitary, and structurally sound for the future occupant.

The stricter property requirements can sometimes lead to an appraisal valuation that does not align with the purchase agreement. This difference arises not necessarily from market misjudgment but from the FHA appraiser’s specific mandate to identify and report conditions that fall short of HUD guidelines. Therefore, while a low FHA appraisal is not an everyday occurrence, it is a common enough scenario that buyers and sellers should understand the implications.

Key Factors in FHA Appraisal Valuation

FHA appraisals are comprehensive evaluations that prioritize the health, safety, and structural integrity of a property, alongside its market value. An FHA appraiser adheres to the Minimum Property Standards (MPS) established by HUD, which dictate the conditions a home must meet to be eligible for FHA financing. These standards extend beyond typical market valuation considerations, focusing on aspects that could impact the occupant’s well-being or the long-term viability of the property.

For instance, peeling, chipping, or flaking paint in homes built before 1978 is a common issue that can lead to a low appraisal, due to concerns about lead-based paint. Appraisers also look for other conditions that must be addressed, such as missing handrails on staircases, exposed electrical wiring, or non-functional major utilities like heating, plumbing, or electrical systems. Issues with the property’s exterior, such as damaged roofs or significant foundation cracks indicating structural concerns, also fall under MPS scrutiny.

Appraisers also consider the property’s market value by analyzing recent sales of comparable homes in the area, known as “comps.” A lack of suitable or recent comparable sales in a particular market can make it challenging for the appraiser to support a higher valuation, potentially resulting in an appraisal lower than the contracted price.

Navigating a Low FHA Appraisal Outcome

When an FHA appraisal comes in lower than the agreed-upon sales price, the lender typically informs the buyer and provides a copy of the appraisal report. This outcome creates an “appraisal gap,” which has immediate implications for the transaction. The FHA loan amount is determined by the lower of the sales price or the appraised value.

This means if the appraisal is lower, the FHA loan will only be approved for a percentage of that reduced value, leaving a financing gap between the loan amount and the original sales price. The buyer cannot finance this difference through the FHA loan; any shortfall must be covered out of pocket. This situation places the initial contract in jeopardy, as the buyer may not have the additional cash to close the deal at the original price.

A protection for buyers in this scenario is the FHA Amendatory Clause, which is a mandatory provision in all FHA purchase contracts. This clause stipulates that the buyer is not obligated to complete the purchase if the property’s appraised value is less than the contract price, allowing them to withdraw from the transaction without penalty and typically retain their earnest money deposit.

Options for Responding to a Low Appraisal

Upon receiving a low FHA appraisal, several actionable steps can be explored to salvage the transaction. One common approach is to request a Reconsideration of Value (ROV). This process is typically initiated by the lender on behalf of the buyer and requires submitting objective evidence to support a higher valuation.

Such evidence might include additional comparable sales that were not initially considered by the appraiser, or documentation of factual errors found within the appraisal report. It is important to note that only one ROV request is generally permitted per appraisal, and it must be supported by strong, verifiable data.

Another option involves price renegotiation between the buyer and the seller. The parties can agree to lower the sales price to match the appraised value, or they might negotiate a compromise where the seller reduces the price somewhat and the buyer covers the remaining difference.

If the buyer has sufficient liquid funds, they can choose to bring additional cash to closing to cover the entire gap between the appraised value and the original sales price. In cases where the low appraisal is due to specific FHA-required repairs related to Minimum Property Standards, the seller may agree to complete these repairs. This can lead to a re-appraisal or a final inspection to confirm the property now meets FHA requirements.