FHA Home Loan Appraisals - Appraisal Methods

All three methods used to determine market value, the sales comparison approach, the cost approach, and the income approach, are market oriented and must reflect market data and the market behavior of buyers.  

Using the sales comparison approach, the market value is determined by adjusted the sales prices of recently sold similar properties (comparables).  The sales prices of the market comparables reflect the behavior of typical buyers in the marketplace.  

With the cost approach, market value is determined by calculating the replacement cost of an identical home plus the cost of the land underneath the home minus any depreciation over the years since the home was first constructed.  

The income approach analyzes the market rents of comparable properties and applies the gross rent multiplier in relation to expected rents from the subject property to determine the market value.  

As a general rule of thumb, the sales comparison approach has the most weight when determining the market value of a home that is to be insured by an FHA loan.  The cost approach is calculated and often supports the conclusions that the FHA appraiser calculated using the sales comparison approach.  The income method is only used when the borrower is financing a triplex or a four-plex under FHA guidelines.