What Affects the Sale Price of the Home I Want to Buy With an FHA Mortgage?

The final price of a home is influenced by its market desirability and its compliance with standards for safety, security, and structural soundness. How much will your FHA home loan be? Much depends on some these factors as they are viewed during the appraisal process, but not all. We examine some important issues below.

Before a home is ever subjected to an appraisal, its value may be determined by a group of non-financial factors influencing the initial asking price.

Supply and Demand

When there are more buyers than homes, prices are driven up by competition. Conversely, when inventory is high and there are fewer buyers, prices tend to soften as sellers compete for a smaller pool of purchasers.

Location

Key components of a desirable location for a new home may include the following factors:

• Properties within highly-rated public school districts consistently command higher prices.
• Convenient access to employment centers, shopping, public transportation, parks, and healthcare facilities increases a property's value.
• The state of the neighborhood, including public spaces and infrastructure, plays a significant part in valuation.

Comparable Sales (Comps)

What is a comp? An indicator of this value is the recent sale price of similar, nearby properties. This is the principle of "comparable sales," or comps. Appraisers and real estate agents rely on comps to determine a fair market price. An effective comparable property is one that includes the following:
 

• Typically, within a one-mile radius of the subject property.
• Usually, properties are sold within the last three to six months, as market conditions can change quickly.
• Similarity of key features matters, including square footage, number of bedrooms and bathrooms, lot size, age, and overall condition.

Appraisers may make financial adjustments to the prices of comps to account for differences.

Property-Specific Features and Condition

Finally, characteristics of the home itself help determine the sale price. These factors include but are not limited to the following issues:
 

• The square footage, number of bedrooms and bathrooms, and aspects of the floor plan may affect the sale price.
• A newer or recently renovated home will typically be higher in value than an older home with needed maintenance.
• The condition of major systems such as the roof, HVAC, plumbing, and electrical is particularly important.
• Modernized kitchens and bathrooms, high-quality flooring, energy-efficient windows, and other premium finishes can add value.
• The size of the property, its landscaping, and features like a fenced yard, deck, or garage contribute to its price.

Minimum Property Standards

FHA loan rules require homes purchased or refinanced with an FHA mortgage to meet criteria for safety and security. A house that is up for sale that does not meet those standards at the time you make an offer may require corrections, and depending on those fixes, the out-of-pocket costs of the loan may increase.

The property must be free from hazards that could endanger the health and safety of the occupants including the following issues:
 

• In homes built before 1978, any deteriorating paint is presumed to be a lead-based paint hazard and must be scraped and repainted.
• Staircases with more than a few steps must have secure handrails to prevent falls.
• Any unsafe electrical conditions, such as frayed wires or uncovered junction boxes, must be repaired.
• This includes broken steps, damaged flooring, or any other defect that could cause injury.
• All windows and exterior doors must be intact, operational, and capable of locking. A broken window pane or a door that does not close properly must be fixed.
• The property must protect against the elements.
• The foundation must be sound and free of significant cracks or water damage. The appraiser will look for signs of settling, bowing walls, or persistent moisture intrusion in the basement or crawl space.
• The lot must be graded to direct water away from the foundation to prevent structural damage.
• The home’s essential systems, including plumbing, electrical, and heating, must be in good working order. The property must have a permanent heat source capable of warming the entire home.
• The property must be free from termites or other wood-destroying insects. If an appraiser notes evidence of an infestation, a professional pest inspection and remediation will be required.

FHA Loan Limits

FFHA loan limits impose a hard ceiling on the price of a home that can be purchased with an FHA mortgage in a given area. A borrower cannot use a conforming FHA loan to purchase a home with a sale price that exceeds the established limit for that county, regardless of their personal financial qualifications.

This factor effectively removes homes above a certain price point from consideration for FHA buyers who choose not to consider using an FHA jumbo loan instead.