Why Are FHA and VA Appraisals More Difficult than Conventional Loans?
Transcript of the above video!
This is Matt Heisler with Vanderbilt Properties. In this video, we will discuss why FHA and VA loans have a more difficult appraisal process than conventional financing. We will also address some of the problems you might encounter. If you plan to buy a house using an FHA or VA loan, this information is crucial to ensure you are targeting suitable properties and avoid appraisal issues. If problems arise, the seller may not agree to fix them and may seek a buyer with a different loan type. To save time, target houses with minimal appraisal issues. These issues may not be apparent during inspection.
What makes VA and FHA loans special? They require significantly less money down than other loan types. Many people believe 20 percent down is necessary to buy a house, but this is untrue. Most first-time buyers, especially in expensive areas, obtain higher loan-to-value (LTV) loans. Sometimes it is 10 percent down, and sometimes as little as five percent. For higher LTV ratios, VA and FHA loans are often used. Private lending with such low down payments is uncommon. FHA loans offer another advantage: generally, credit requirements are less stringent than for conventional financing. This can vary, but it is a general rule. FHA loans make sense for those with lower credit scores and less than five percent for a down payment.
I recommend buyers save an extra 1.5 percent to reach five percent down and pursue conventional loans. This often makes the house a better asset. However, this is a general recommendation, and FHA or VA loans are sometimes the best option. VA loans, for veterans, allow zero percent down and 100 percent financing. This is a significant benefit. These are high LTV loans, meaning more money is borrowed relative to the house price. VA loans at 100 percent are among the highest LTVs available.
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High LTV loans often indicate buyers with limited cash. While anyone can use an FHA loan, many users lack capital. Therefore, appraisers thoroughly examine the house to ensure there are no significant upcoming expenses. Lenders worry about foreclosure costs and potential losses if the buyer cannot cover expenses. Conventional financing with 20 percent down reduces this risk. Lenders are confident they will be repaid, even if the market fluctuates. This is why conventional financing offers lower interest rates and is more appealing. However, if conventional financing is not an option, FHA and VA loans are better than renting. Lenders take on more risk with these loans and must ensure the property will not cause issues for the buyer.
With conventional loans, structural problems may be acceptable with repairs. However, FHA loans will not be approved for houses with obvious structural issues, including termite damage. Significant mold is also a disqualifier, as it poses health risks and cleanup is expensive. The FHA does not differentiate between minor and major mold issues. The roof must be in good condition, with no leaks or signs of needing replacement soon. Lead paint is a concern for FHA appraisers. They look at the house's age and require peeling paint to be fixed in homes built before 1978. The heating system must be operational, and all bedrooms must have heat, at least in Massachusetts. Deteriorated asbestos wrappings are another potential issue.
This is not an exhaustive list. FHA appraisers may be particular about handrails and basement floors. The FHA's scrutiny stems from the low down payment opportunity. They need to ensure buyers do not run out of cash in the first few years. In the long term, houses are generally good investments, and buyers often refinance out of FHA loans. Once there is 10 percent equity, refinancing is common, and the buyer's financial situation likely improves. This enables them to handle capital improvements and safety issues. FHA and VA loans offer an opportunity to buy property with high LTVs, but appraisers are thorough before approving these sales.
Really, there's just a lot of things that the FHA cares about. But it's all because you're taking advantage of an opportunity to put very little money down to buy a fairly expensive asset, and they need to make sure you don't run out of cash in the first couple of years. So, why do they not worry about it in the long term? Well, in the long term, a house is generally a good investment they. Go up in value, and you're probably going to refinance out of that FHA loan as soon as you can, simply because it's not a very cost effective loan. As soon as you have 10 equity in the property, they know you're probably going to finance your way out of it. And on top of that, you're probably going to be in a better financial situation, so that when things like capital improvements or safety issues come up and need to be fixed. You'll have the cash to do. It doesn't mean you'll want to spend it, but it does mean that you'll have the cash to do those things there you have it. Folks, that's my overview of why FHA and VA loans are great because they give you an opportunity by property with really high LTVs, but also why the appraisers are so careful before they let those properties get sold.
