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FHA: Appraisal Or Home Inspection?

Written by on Monday, 18 April 2016 2:12 pm
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People in the real estate business know there's a big difference between an appraisal and a home inspection. But this difference may not be so apparent to others. To be sure, an appraisal results in a number representing the value of the house, and there's no such figure at the conclusion of a home inspection. But it seems that much of what the appraiser does in order to reach a conclusion is essentially the same as what a home inspector does.

The similarity between what appraisers and home inspectors do is especially striking if FHA financing is being used in the transaction; the FHA appraiser is called upon to make a variety of observations and judgments that are expected of a home inspector as well. Are the hand rails up to code? Is there peeling paint that could be a health hazard? Are the appliances that are included in the transaction in proper working order? Are there any roof leaks? Do the heating and air conditioning (if present) systems function correctly? Is water pressure adequate and is their proper drainage around the house? The list goes on and on.

It is no wonder that FHA buyers -- many of whom may lack experience when it comes to real estate purchases -- are sometimes inclined to forego having a home inspection because they mistakenly believe that essentially the same job has been done by the appraiser.

Concerns about this and related issues have arisen since the FHA recently released an updated version of its Single Family Housing Policy Handbook. The guidelines contained therein focus more stringently than did past versions on the appraiser's duty to inspect and analyze. Thus it was that a few weeks ago (March 18), Tom Salomone, 2016 President of the National Association of REALTORS®(NAR) wrote to Edward Golding, Assistant Secretary of Housing, at the Department of Housing and Urban Development (HUD), urging that FHA revise some of the language in the new handbook.

Not only did Salomone voice concern about buyers failing to obtain home inspections, but also he cited problems occurring within the appraisal community itself. Salomone wrote as follows:

"Unfortunately, many appraisers have become wary of participating in FHA-insured home loan transactions given the confusion with the Handbook requirements. Concerns over liability are leading many appraisers to require the current homeowner to take time away from work to physically test washer/dryers, stoves, etc., so that the appraiser cannot be blamed for any related damage.

The result is that many appraisers are increasing their fees for FHA appraisals. Some appraisers have opted out completely of FHA appraisals, or are asking for additional home inspections to comply with the Handbook."

In his letter, the NAR President offered three specific suggestions.

(1) Remove "operate all conveyed appliances and observe their performance"

"Each party [buyer, seller, lender, agent] has a different interpretation of the requirement of the appraiser in evaluating appliances as the Handbook does not explain the extent of testing needed to determine if an appliance is operational. NAR members have told us that appraisers are being asked to run washer/dryers and operate stove burners, without any sense of how long to run the washer/dryer or how far up to turn the burner, in order to fulfill FHA requirements… NAR asks that FHA require appraisers to determine whether the conveyed appliances are in a condition to be operated based on a visual observation, by noting connection to an electric or water supply, and remove the instruction to ‘operate' or ‘observe their performance.'"

(2) Change "observe, analyze and report" to "observe and report"

"According to the newly published Handbook, ‘the Appraiser must observe, analyze, and report" that a property meets HUD's Minimum Property Requirements (MPR) and Minimum Property Standards (MPS) for safety and soundness purposes. The quoted language is new to the FHA guidelines for appraisals and can be construed to increase the appraiser's scope of work, such that tasks traditionally undertaken during a home inspection are being covered by the appraisal."

(3) Revise form HUD-92564-CN, For Your Protection: Get a Home Inspection

"…to give consumers a clear understanding of the differences between a home inspection and an appraisal, FHA should consider:

  • Changing the paragraph header text ‘Appraisals are Different from Home Inspections' to ‘Appraisals are NOT Home Inspections.'"
  • Changing the paragraph text ‘An appraisal is different from a home inspection and does not replace a home inspection,' to ‘An appraisal is not a home inspection and is not an alternative to a home inspection.'"
  • Adding the text ‘An appraisal makes sure that the house meets FHA minimum property standards and requirements, which do not include all items reviewed in a home inspection.'"

Small suggestions, it would seem, but with big implications.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is This email address is being protected from spambots. You need JavaScript enabled to view it..

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