FHA appraisals are flagged by issues impacting safety, security, or structural integrity, often requiring repairs before closing. Major red flags include peeling paint (pre-1978 homes), roof leaks or < 2 years life, broken HVAC/utilities, foundation issues, exposed wiring, and lack of functional handrails or proper site drainage.
Peeling or chipping paint (especially in homes built before 1978) Inoperable smoke detectors. Roof leaks or significant water damage. Faulty heating, plumbing, or electrical systems.
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Major structural issues that are common FHA red flags include cracked or crumbling foundations, deteriorating roofs, and water damage. Other red flags that appraisers look for include: Missing handrails. Cracked windows.
Top reasons homes fail inspection
Foundation flaws such as cracks, troublesome tree roots and uneven settling or lack of steel reinforcement. An aging, damaged or deteriorating roof. Missing flashing or shingles. Damaged siding.
Disturbances on the property, including sinkholes, oil or gas wells, or abandoned wells. The inspector will look for anything that might make the property dangerous for inhabitants. Building issues. Structural problems and defects, including any signs that the property has foundation damage or wall damage.
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan. The FHA prioritizes the well-being of borrowers and aims to ensure that the homes they finance are safe and healthy environments for residents.
Scenario #1: Foundation Problems
Your home inspector will look at each of the home's structural elements, including the foundation, crawl space, basement, framing, roof, and walls. Of these, the foundation is the first area of potential concern.
The requirements for FHA and VA aren't that strict. You need a heater, running water, no obvious safety issues and no habitability issues. I've done thousands of these transactions and less than 1% have corrections. It's important to note that a home won't fail the inspection.
Structural damage like foundation issues, evidence of termites, mold, peeling paint, etc can disqualify it. But if sellers are willing to do stuff before closing you just have to pay for them to come back out for reinspection. I would stay away from anything that the realtor is saying probably won't pass.
FHA Appraisal Checklist
Many people view cracked or peeling paint on or in a home to be a purely cosmetic issue, but that is not always correct. If a home was built prior to 1978, lead contamination could be an issue. FHA home loan rules require the seller to provide full disclosure of any known lead hazard.
If the FHA appraiser flags certain issues—peeling paint, loose handrails, or other safety issues—the loan is put on “hold” until they're fixed. That's not the case with a regular appraisal used for a Conventional home loan.
Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser's estimate of value.
Foundation cracks, poor drainage, or structural shifts are the top reasons homes fail inspection. Roof damage, leaks, or failing seals often lead to costly moisture problems. Plumbing leaks, low or high water pressure, and old water heaters frequently trigger inspection flags.
While there is variation of what home inspectors look for, there are areas that are typically not covered in a standard home inspection, such as: Pest control (such as termites, carpenter ants and rodents) Swimming pools. Asbestos.
By understanding the red flags to watch out for in appraisal reports—such as inconsistent property descriptions, inappropriate comparables, and unexplained adjustments—you can take proactive steps to ensure the accuracy of your property's valuation.
Overview of Common Red Flags
These red flags often hide in plain sight, especially in contracts that appear straightforward. Common pitfalls include ambiguous language, one-sided indemnity clauses, missing termination options, and unclear payment terms.