Appraisals for Conventional loans versus FHA loans - is there a difference?

When meeting with clients, it's important to remember that there is indeed a difference betwwen appraisal for Conventional loans versus appraisals for FHA loans. 

The appraisal that is required for a conventional loan, will be based primarily on the actual value of the home. This can be accomplished by either the cost method, the income method, or the comparable sales method, but is almost always done with the latter. The comparable sales method of course is basically self explanatory. The Appraiser takes as resent sales as possible, with as similiar features as possible, in as close proximity to the subject property as possible, and uses them to determine the value of the property being appraised.

An FHA appraisal on the other hand, will take into account all of those things of course, but will also make sure that the property meets the department of Housing and Urban Development’s ”Minimum Standards of Living.” Some of the things the property can’t have are broken windows, or broken stairs (and if more than 3 steps there has to be a hand rail), it can’t have holes in the walls or ceilings, and if there is a spot for a built in appliance than that appliance must be present in the spot. There also must be a safely working electrical system, and an operable heating and cooling system. Generally summed up, the property can’t be in bad repair, and must be, in the terms of the appraiser, “livable”.
The big thing that a buyer needs to remember about the differences in these appraisals, and also the loans that go along with them, is that if a property is in bad shape, or sometimes just even a little TLC, it may not be feasible for a property to be able to pass an FHA appraisal. By pass, I mean that the appraisal must come back with either no noted repairs, or repairs that a seller is willing to do prior to closing. When a property is in foreclosure or possibly being sold at an attempt at short sale, especially when there is obvious work that needs to be done to a property, the bank or seller is often times not going to be willing to do the work. Without the seller doing the work, the property can’t be sold under that appraisal. Which means that a buyer who doesn’t qualify for a conventional loan, may not be able to buy a property that needs work.

In summary, the thought process seems to be that if the buyer can qualify for conventional financing (which is generally more diffucult that to qualifying for an FHA loan), that borrower has more resources available to maintain a property in less than pristine condition.