FHA appraisals are considered strict regarding the safety, security, and structural soundness of a property, focusing on making the home "safe, sound, and secure". They are generally more rigorous than conventional appraisals, often requiring repairs before loan approval to address health hazards, structural issues, or broken systems.
A red flag is going to be any major defect or safety concern, such as a leaky roof, mold, or structural damage. Remember, FHA appraisers are looking for obvious hazards and structural issues that could impact the home's habitability or long-term value.
An FHA appraisal won't pass if a property has significant health, safety, or structural hazards, like a leaky roof, exposed wiring, missing handrails, mold, or a crumbling foundation, because the FHA ensures the home is safe and habitable; issues like peeling paint (especially lead-based), broken windows/doors, inadequate heating, or pest infestations also cause failures, requiring repairs before loan approval.
FHA appraisal and inspection checklist
While FHA appraisals have a reputation for being strict, if the home is in relatively good condition and well-maintained, it's more likely to be approved. If major systems work as they should and there aren't any big safety concerns, recommended fixes are often inexpensive and easy to complete before closing.
The FHA 85% rule refers to a past guideline for cash-out refinances limiting the loan to 85% Loan-to-Value (LTV) and a specific rule for identity-of-interest transactions (like buying from family) where borrowers couldn't finance more than 85% of the home's value unless exceptions applied, such as renting from the family member for at least six months prior. While the general cash-out LTV is now 80%, the 85% rule still applies to certain related-party sales, requiring a 15% down payment unless an exception is met, notes FHA.com.
Reasons for an FHA Rejection
There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.
The appraiser is required to make a thorough inspection of the attic and all visible roofing areas for signs of failing roofing materials and report all roofing deficiencies in the appraisal report. iii: HUD-FHA makes no guarantees or warranties as to the roof's condition.
Water damage can be the most expensive of all the major issues a home inspection may encounter because it can cause so much damage. If you leave for the weekend and come home to a pipe burst, you will most likely be looking at tens of thousands in damages and restoration.
Denial rates vary by loan type, though. FHA loans had a higher denial rate at 13.6%, while conventional conforming loans had the lowest at 7.9%, showing some variation depending on the program you choose. Refinance applications tend to have higher denials, with an overall rate of 32.7% in 2023.
You're disqualified as a first-time homebuyer if you've owned a home in the last three years, have a low credit score (usually <620), a high debt-to-income (DTI) ratio (over ~43%), unstable employment (less than 2 years steady), insufficient income, or if the property itself has major issues, while income limits for some programs can also disqualify high earners, with specific definitions varying by loan type (like FHA vs. Conventional).
FHA Appraisal Checklist
Uninsurable property is a home that is not eligible for insurance through the Federal Housing Administration (FHA) because it needs extensive repairs. An uninsurable property is typically ineligible for a mortgage through the FHA.
Closed-end debts do not have to be included if they will be paid off within 10 months from the date of closing and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower's gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
An FHA appraiser assesses everything a traditional appraiser does, like confirming the market value of a home and evaluating the property's condition, but they also ensure the property meets the FHA's required safety and livability standards.