Getting An FHA Loan? Here Are The 5 Top Red Flags To Watch Out For On The Appraisal

There are dozens of things that can cause an appraiser to torpedo your FHA-insured loan, and hundreds more that can complicate things, sometimes beyond hope. So how do you unpuzzle which problems will put your mortgage on the line? Are they the most frequent points of failure, or the conditions about which government guidelines are inflexible?

Let's look at the concerns that fit both categories. The following issues come up a lot, and the HUD guidelines for Title II loans will prevent a sale from going through if any of these situations threaten the safety, security, and soundness of the property. Sometimes the problems can be rectified by negotiating with the seller to fix the issue, but simply reducing the home's price won't do the trick. These have to be addressed before an FHA-insured loan can even be approved.

There seems to be much confusion about HUD's Minimum Property Standards (MPS) and Minimum Property Requirements (MPR), exacerbated by the fact that even HUD does not seem to apply the terms consistently. One (usually MPS) is a set of requirements for new construction to qualify for a Title II (FHA-backed) loan, while the other (usually MPR when referenced by government agencies, but MPS when referenced by everyone else) is a set of requirements that an existing property must meet. It's largely irrelevant, though, since both are grouped together as Property Acceptability Criteria and apply to FHA-insured loans. That's right: The FHA requires that a property meet the HUD PAC, including MPR and MPS. For now, though, let's get past the nitty-gritty labels and look at the actual issues in a home which could block your loan. 

You (probably) will not be shocked to learn that a home with a cracked, crumbling, or abnormally settling foundation sets off alarms for the people who are giving your loan a thumbs-up ... or thumbs-down. This is determined by the appraiser's assessment of whether or not the home's foundation will survive for the term of the mortgage loan and be able to handle any normal load. Aside from visible damage, the appraiser will be looking for evidence of an unhealthy relationship between the foundation and water. An excessively damp basement or crawl space, not to mention pooling water in the crawl space or against the foundation, might indicate foundation issues.

In some circumstances, the appraiser will declare that potential foundation issues must be further investigated by a qualified inspector. These include an excessive quantity of standing water next to a foundation, a very damp basement, and evidence of structural failure. Possible structural failure can be indicated by deformities to the foundation wall, like bulging, visible cracks, or unsupported floor joists.

For new construction, site grading should facilitate draining groundwater away from the building, and minimize erosion and earth movement or settling. For new homes on a slab, the slab should be properly designed to minimize damage from earth movement. Depending on the region and intended flooring, a vapor retarder and a base course of gravel or a similar material might be required.

If it's common sense for an appraiser to expect a house's foundation to continue holding the house up, it's also perfectly understandable that appraisers will want to see a sound, watertight roof that can perform all the functions of a roof. A roof covering should be expected to last at least two years after the appraisal. The roof should be free of leaks and any other potential health hazards. The appraisal standards also mention, in addition to leaks, the possibility of a "worn out" roof... presumably a roof that is not leaking but which has sufficient age and wear that leaks can be reasonably anticipated within the two-year period. A roof should not show visible sagging or rotting rafters. Additional inspection by a professional roofer can be required by the appraiser.

For new construction, roofs should be constructed in accordance with the provisions of the NRCA Roofing Manual. Gutters should be installed on one-story buildings that have a roof overhang of less than 12 inches and on two-story buildings with a roof overhang of less than 24 inches. There is also guidance available for which homes need scupper drains and how downspouts should be sized.

Continuing our tour of the obvious, it's time to observe that walls hold a special place in the hearts of FHA appraisers. Walls shouldn't show excessive cracking, bowing, or leaning. Sometimes, such signs don't indicate a problem with the framing or wall construction, but an issue with the foundation or earth settling or movement. There's a seemingly endless list of potential issues related to walls: Termite infestations, building code compliance problems, stains related to leaks, chipped or peeling paint, windows that don't work properly, missing handrails, extensive or wide cracks. Most of these are minor issues that can be handled via negotiation, but major structural problems are a hit-the-brakes signal for the FHA mortgage process. Note that appraisers are not required to cut into or otherwise open walls, but must report if access for inspection wasn't adequate.

Walls in new construction may be subjected to direct testing to verify their ability to resist racking and support certain loads. Windows and sliding glass doors must also meet load criteria and water resistance standards. Walls are subject to insulation energy efficiency standards, specifications about the nature and quality of finish materials, requirements related to material compatibility, and unfathomably many more specs.

From a certain point of view, many building materials are hazardous. Some off-gas toxic fumes, and many might very well fall on your head if you're not careful. But an FHA appraiser is mainly looking for a fairly limited set of potentially dangerous materials in an existing house ... some of which are fairly obscure. For example, a petroleum product well (even a disused one) might emit hydrogen sulfide gas, so take note if someone has been drilling for oil on the property. Underground storage tanks and nearby landfills or industrial sites can present soil contamination problems. Far more likely, though, are environmental hazards like lead-based paint, mold, asbestos, toxic chemicals (such as methamphetamine contamination), etc. These may be found in building materials or in finishes. The appraiser must note any hazards that would make property improvements difficult, have a negative effect on livability or marketability, or pose a health risk for occupants.

New construction should comply with materials requirements as set forth in HUD's Minimum Property Standards for Housing.

In general, mechanical systems (usually meaning electrical, plumbing, and HVAC systems) must be adequate for their jobs, safe, protected from damage, and be durable enough to have future utility. Appraisers inspect mechanical systems visually, and they are also required to test systems when possible. The appraiser should examine electrical systems and flag any exposed wiring, visibly damaged wiring, or potentially inadequate amperage on any circuits. You can also expect the appraiser to test switches, light fixtures, etc. throughout the house. Plumbing is expected to function properly in terms of supplying water pressure and providing adequate waste removal. Testing of toilets, faucets, and other fixtures should be done to expose any failures in hot or cold running water, presence of leaks, and the like. The water heater or hot water heating system should function as expected, and the appraiser should look for signs of failure in any septic system that is present. Natural gas and other piped-in utilities should function properly if present.

FHA-backed properties should have a heating system capable of heating living areas to at least 50 degrees, which is installed according to manufacturer instructions, relies on fuel that is locally available, and so on. Air conditioning is optional, but should function properly if present. Faulty or defective mechanical systems, or those that cannot be sufficiently inspected, require further inspection, as determined by the appraiser. All utilities should be on when the appraisal is done.