Regardless of the loan program that a homebuyer relies on, they can count on consistency in some areas. Every lender will seek a clear history of your financial habits via your credit score and other documentation. You can also expect to be asked to provide proof of a stable income. And, before they agree to finance your choice of home, they will want to be sure it’s worth the sales price.  While it may seem like that last one, the appraisal process, would be identical for all loans that isn’t the case. In fact, one of the most popular loan programs, particularly for first-time buyers, features an appraisal with some additional requirements. FHA Loans A mortgage insured by the Federal Housing Authority (FHA) provides added protection for the lender by guaranteeing repayment even if the borrower defaults. Often, the minimum credit score and down payment requirements for these are less restrictive compared to loans that are not insured by the federal government and are known as conventional financing. These insured FHA loans provide an opportunity for individuals who might otherwise be turned down for a loan.  Although they may be easier to qualify for, FHA loans may also come with higher interest rates, additional closing costs or lower limits than conventional financing. Still, they can be the best option for many buyers. However, it’s important to note that the difference also extends beyond the loan’s terms to include a more thorough appraisal process.  Conventional Appraisals Any appraisal is primarily a way to determine a home’s value. In most cases, a licensed appraiser will assess the property in question and compare it to similar, nearby properties that have sold recently. After making adjustments based on differences in size, condition or features, they will calculate the appraised value. This provides the lender with an independent assurance that the home is worth at least as much as the sales price and prevents them from lending more than the property’s value.    While not a substitute for an inspection, even conventional appraisals will take the home’s condition into account. Significant problems can lower the value but will not necessarily derail conventional financing as long as it still meets the minimum price threshold. Alternatively, in the case of an FHA appraisal, the focus on a home’s safety and integrity is more substantial.  FHA Appraisals Since an FHA loan comes with federal insurance protection, an FHA appraisal will go beyond just the market value of the property. Appraisers will also be confirming that the home meets minimum standards for health and safety. Lead-based paint that is cracked or peeling, major appliances that don’t work, roofs with less than three years of life remaining, and missing smoke or carbon dioxide detectors are among the items that can cause a problem. Repairs to these types of deficiencies are mandatory before FHA financing can be approved. Since most buyers will want many of these repairs made regardless of their loan requirements, sellers are often willing to negotiate to keep the deal on track.  However, if you plan to rely on FHA financing for your next purchase, speak with your lender about the specific appraisal requirements. Completing the purchase of a fixer-upper could hinge on your ability to qualify for a conventional loan.  Don’t start your next home search without understanding the differences between mortgage solutions. Visit OpenMortgage.com to learn more about the loan options that fit your goals, or call to speak with a representative today.
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