If you’re a first-time homebuyer in MN you need to be aware of a couple issues that arise in a lot of FHA (Federal Housing Administration) appraisals.
First off, an FHA appraisal is different than a normal conventional appraisal in a number of different ways. The biggest difference is that issues such as peeling paint, anywhere inside or outside on the house, will need to be removed before closing if the house was built before 1978. This is because of the dangers of lead-based paint. So, if the house you’re buying does have some paint that is peeling it should either be removed by the seller before the appraisal or you should be prepared to have it “called” on the appraisal, and deal with it so the appraiser can go back out before closing to make sure it’s been removed and taken care of properly.
If you or the seller cannot remove the paint, then you’ll have to switch to a Conventional Loan, or get something called an FHA 203(k) Loan, which will allow these repairs to be done by a licensed contractor after the closing. Most likely you should not get a 203(k) loan just for some peeling paint–you’d be better off having several other repairs and updates made in that type of renovation loan.
Another issue that most buyers and sellers don’t know about an FHA Appraisal is that it stays good for 6 months. So, if you have a Purchase Agreement signed for a price of $200,000 and the FHA appraisal comes back at $180,000 you have a few options:
1) You can come up with the $20,000 difference to pay the seller at closing. This is not a good route to take, and not even possible for most people.
2) You can switch your financing type to a Conventional Loan and have another appraisal done for a conventional mortgage.
3) You can negotiate with the seller to lower the sale price to this new $180,000 amount. This is probably the most common route buyers will take if the appraisal comes in lower than their sale price.
You should be able to back out of the contact and receive your Earnest Money back if the seller does not agree to lower the sale price in #3′s case. Also, sellers are more likely to lower their sale price to this new amount since the FHA appraisal stays valid for 6 months. That means if they reject your negotiation and put their home back on the market, they may run into the same issue with another buyer if that new buyer is obtaining an FHA loan. And just to let you know, somewhere around 80-90% of buyers are getting FHA mortgages in today’s market. So the chances of the buyer being FHA are pretty high in most of these cases.
