Difference Between FHA and Conventional Appraisals

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Over the past couple of years, there have been dramatic changes in the market, thereby reducing home foreclosures. However, with the reduction in foreclosure numbers, the market requirements have increased. Home appraisal demand is very significant for homeowners. As such, whenever a buyer makes a plan for buying a house, he should ensure that the kind of property he would want purchased is proportionate to the loan type for which he has applied. This is due to the fact that each mortgage has a property requirement for appraisal before a buyer is given a loan. Nevertheless, there are some exceptions where loan products do not need appraisal.

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When one looks at the type of property appraisals that are carried out in the market, you will note two types: Conventional Appraisal and FHA Appraisal. Upon the application of an FHA loan, among the loan requirements is that home appraisal is carried out at higher standards in comparison to the conventional appraisal. FHA has a requirement for the least down payment while the conventional loan has a requirement of a high down payment in spite of the low standards.

The basis of a conventional appraisal is on the actual value of the home, which may be calculated by income method means, cost method, or method of comparable sales. Of the three methods, the method that is commonly used is the one for comparable sales. It enables the appraiser in calculating property value that is being appraised by taking the sales that are most recent having similar characteristics and which are related closely to the subject property.

Conversely, FHA, besides taking into consideration all the mentioned details above, also confirms if the house undergoing appraisal is able to meet the minimum living standard requirement as set by the Housing and Urban Development (HUD) department. There should be no broken windows, broken stairs, or holes in the walls and ceilings. If a staircase has three or more broken steps, then there should be a handrail. It is also recommended that there be an appliance at a particular spot in case there is a place built in. Additionally, a cooling and heating system and an electric safety system in a good working condition need to also be present. In summary, the property should operate properly and should not be repaired badly.

In both cases, loan terms differ from one another. When applying for an FHA loan, a minimum credit score is required. Additionally, there is a 3.5% down payment required for this type of loan, and sellers are allowed to pay close to 6% of the price property for the buyers’ closing costs. A buyer can afford a property with FHA loans since it reduces the entire monthly payments by enabling a high ratio of debt to income and by offering them the chance of paying low mortgage insurance premiums. One may also make use of the gift funds that your loved ones give to you. However, one is expected to pay a 5% minimum down payment. The insurance premium of the mortgage is high comparatively in a conventional loan, and the seller is allowed to pay 3% of the purchase price in the closing costs of the buyer.

FHA appraisal usually insures a mortgage by offering backing on behalf of approved and eligible borrowers, unlike the conventional appraisal. This explains why it is referred to as the insured FHA mortgages. The main reason this is so is in ensuring that lenders want to ensure that the purchased property through the insured mortgages is securely and well maintained. Conventional appraisal does not bother whether the purchased property is secure and safe or not.

As such, it is always important to consider that whatever method of appraisal is used, one should consider at all times the property type that interests you and in turn match with the loan type that you apply for.

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