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Why Are FHA Appraisals Always Valued Lower Than Conventional?

FHA appraisals are not generally appraised for a lower value, at least not in any way that can be proven reliably and not for any valid reason that we can think of.

We have often heard complaints from Realtors about FHA appraised values being lower than appraisals performed for conventional loans.

There is very little difference in the process to develop the value for FHA versus conventional loans. In both instances the definition of value, report form, and the evaluation process are very similar. HUD does specify detailed inspection requirements for the appraiser, but an experienced appraiser is usually going to inspect those same items in the same way to accurately determine the condition of the home regardless of the loan program.

If you find the FHA appraisers are more thorough during their site visit, then it is probably a result of their higher level of qualifications and perhaps they have been doing the job longer. Don't get mad at the appraiser that does their inspection more carefully, be mad at the one that rushes in and out. Which one do you think is going to do a more careful and complete market analysis? Which one is going to provide a more accurate value?

I'm sure you know Realtors that are not very good at their jobs. Some Realtors don't do enough market analysis to produce a credible CMA or don't get good photos for their listings. Within the Real Estate Appraisal profession there is also a wide range in the quality of the person doing the job. HUD does have more complete certification statement requirements about testing/viewing certain items as part of their scope of work, but the reality is that many of those same testing/viewing requirements were often part of the job already.

Before we start getting swamped with hate email and war stories about low FHA appraisals, please consider that IMPRESSIONS are hard to defeat. When people get something in their mind, occurrences that seem to support your impression are noticed more often and retained more easily.

Also consider this: Take a look at this list from a recent online article I found which essentially asserts that FHA appraisals have lower values because they are more stringent. In support of their argument they list these as FHA requirements that are "more strict" than conventional:

  • Roof to be in good repair with no work needed for 2 years
  • Sufficient living space for the family & satisfactory condition of the home
  • Must be able to access the home from the street
  • Solid foundation required
  • Safe stairways and handrails installed
  • No chipped or lead paint
  • All appliances operable
  • Environmental or noise issues - including airport zones - and impact on value

With the exception of "all" appliances being operable, every single one of these conditions could cause 99% of typical conventional loans to be stopped dead in their tracks. Reviewing our prior article on condition issues may help explain why lenders of all types generally do not loan on properties that have safety, health, or structural issues.

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