Appraisals for 203k Loans: What You Need to Know
If you want to get a 203k loan to renovate a property, you’ll need to have a licensed, HUD-approved property appraiser issue a full appraisal on the property. The most important function of the appraisal is to determine the estimated market value of the property. That information will be used so that your lender can calculate just how much they can lend you, based on the maximum 96.5% LTV limit for FHA loans.
What are the Minimum Property Standards for FHA Loans?
In addition to determining the value of the home, the appraisal will make sure that the home is in decent condition, and is generally compliant with FHA minimum property standards. However, since the FHA 203k loan includes money for repairs, borrowers may be able to purchase a home that is not compliant, as long as they plan to bring it into compliance during the renovation process. FHA minimum property standards include:
Decent quality home construction
Exterior walls must be in good condition
Access to clean and safe drinking water
Safe and and public access to the property
Home must have adequate drainage system
Availability of water, gas, sewage, and electric utilities
Electric wiring needs to be safely enclosed
Any and all crawl spaces must have natural ventilation
Home should be free of hazards
Lead-based paints must not be present
What Else Do Appraisers Look at During the FHA Appraisal Process?
In addition to making sure the home complies with HUD’s minimum safety standards, an appraiser will also look at several general aspects of the home. This is in order to determine its market value and to make sure that there are no major issues that could affect the home’s value in the foreseeable future. In general, the appraiser will examine:
The home’s walls and ceilings
The interior and exterior structure
Heating and cooling equipment and systems
Appliances, plumbing, and fixtures
203k Loans Require an Additional Inspection Post-Renovation
Like other kinds of FHA loans, 203k loans only require a single appraisal, which must occur before the loan closes. However, unlike most other FHA loans, the appraiser will usually prepare two reports. The first report will detail the appraised value of the property as is, while the second report will detail the estimated value of the property once the planned repairs have taken place. And, also unlike other FHA loans, the appraiser will typically need to come back at the end of the renovation process to conduct a final inspection. This will ensure that the work has been done properly and that the results are consistent with the appraiser’s initial post-rehab value estimate.