Reader question: “I have heard the FHA requires a home inspection whenever their loans are being used to buy a house, and that the inspectors can be pretty strict. But then on another website, I read that they only require an appraisal, but the appraiser might also inspect some things during this process. I’m totally confused by all of this contradictory information. Does FHA require a full inspection, or just a home appraisal?”
You’re not alone in your confusion. There is a lot of misinformation online regarding the appraisal and inspection process for FHA-insured mortgage loans. As a result, it is a common source of confusion for home buyers and sellers alike. So let’s clear the air:
FHA Does Not Require a Home Inspection - Just an Appraisal
The FHA loan program is managed by the Department of Housing and Urban Development (HUD). It is HUD that establishes all rules and guidelines for this program.
- HUD does not require FHA borrowers to have a home inspection. But they strongly encourage it. Note the difference.
- HUD does require an appraisal to be completed by an FHA-approved home appraiser.
- The primary purpose of the appraisal is to determine the current market value of the home for lending purposes (and possibly for resale purposes, if a foreclosure takes place down the road).
- In addition to appraising the value of the home, the appraiser will also perform a basic inspection to make sure the home is safe and habitable. But this is not a complete home inspection – not the kind you would get from a professional home inspector.
- In a sense, the FHA appraiser performs double duty. He or she determines the current market value of the home (primary mission), while also doing a basic inspection to ensure the home is habitable.
- It’s generally a good idea to have a property fully inspected before buying it.
So, while HUD does not specifically require a full and independent home inspection for FHA borrowers, they do require the HUD-certified appraiser to inspect the premises for certain issues. If the appraiser finds any HUD violations (such as safety and habitability issues), he or she will document them and report them back to the loan agent. These items must be repaired before the loan can proceed. The HUD-approved appraiser serves a dual function in this regard.
HUD-Approved Appraisers Perform “Double Duty”
When writing this article, I sought clarification from a handful of lenders. I asked them to clarify the appraisal and inspection requirements for FHA loans. One of the best explanations came from a loan officer familiar with the program. His comments echo the “dual function” concept of HUD-approved home appraisers:
As you now know, FHA does not require a third-party residential property inspection (you should have one anyway!); however, the Appraiser is required to note “health and safety” issues. The identified issues will need to be addressed in order to close escrow.
Home buyers who use an FHA loan to purchase a house are required to sign a disclosure form called “For Your Protection: Get a Home Inspection.” It explains the importance of having the property professionally inspected. It also explains the difference between the FHA appraisal and a full home inspection.
To quote the disclosure:
Appraisals are for lenders; home inspections are for buyers. The lender does an appraisal for three reasons: (1) to estimate the value of a house, (2) to make sure that the house meets FHA minimum property standards, and (3) to make sure that the house is marketable…
So the appraiser’s primary missions are to determine the value of the house and to make sure it is safe and habitable. To accomplish this mission, he will inspect some basic items. But it’s not a full-on home inspection. You’ll have to arrange for one of those separately — and I strongly encourage you to do so.