What happens if a home fails an FHA appraisal?

An FHA appraisal is not a pass/fail inspection, but the appraiser must flag conditions affecting health, safety, or the property's soundness. FHA's basic standard is that everything works as designed, so issues such as a leaking roof, unsafe electrical or plumbing systems, peeling paint in a pre-1978 home, or poor site drainage must be corrected before the loan can close. Cosmetic flaws alone do not sink the appraisal.

An FHA appraisal does not issue a pass or fail grade; the appraiser notes deficiencies on the Valuation Conditions (VC) form and values the home as repaired, subject to those conditions. Required repairs are limited to those needed to preserve the property's continued marketability and protect the health and safety of the occupants. Cosmetic items, such as worn-but-adequate finishes, missing shrubbery, dead grass, or mismatched tiles, do not require repair.

If a Federal Housing Administration (FHA) appraisal identifies issues that do not meet the Department of Housing and Urban Development's (HUD) Minimum Property Standards, the appraiser lists them as required repairs. The FHA loan cannot close until those repairs are completed, which is typically the seller's responsibility, and the appraiser must re-inspect the property afterward. Common triggers include roof leaks, exposed wiring, missing handrails, and peeling paint in pre-1978 homes.

If an FHA appraisal finds problems, the flagged repairs must be completed before the FHA loan can close. FHA appraisals hold homes to three minimum property standards from the U.S. Department of Housing and Urban Development (HUD): safety, soundness, and security. Common flags include peeling lead-based paint, roof defects, structural issues, and poor drainage away from the foundation.

A home does not pass or fail an FHA appraisal outright; the appraiser values the property "as-repaired" subject to conditions listed on the Valuation Conditions form. Required repairs are limited to those needed to preserve the property's continued marketability and protect the health and safety of the occupants. The appraiser is only required to note readily observable conditions. An encroachment is the exception, since it generally makes the property ineligible for FHA insurance unless a perpetual encroachment easement is filed.

When an FHA appraisal finds problems, the outcome depends on severity. Minor issues such as peeling paint or broken windows can require repairs, often at the seller's expense, before closing; a low appraisal can create a price gap between value and contract price; and a major health or safety hazard can make the property ineligible for FHA financing. An FHA 203(k) loan can finance the purchase plus required repairs, including structural alterations and elimination of health and safety hazards.