Buyers Frequently Use and Report Benefits from Home Inspections, with Some Noting Problems with Quality and Cost

A substantial majority of the homebuyers using FHA-insured financing in  2002 report getting home inspections and benefiting from them primarily  by being able to renegotiate their purchases. Typically, buyers chose to get  home inspections to make sure there were no serious problems with the  homes they were purchasing and most say the inspection was a positive  experience. Buyers reported that they benefited from the home  inspections because they identified problems that buyers were often able  to get sellers to address before closing. Even though home  inspections are optional, over 60 percent of all buyers (existing homes and  new construction) believed FHA required them. The results may point as  much or more to the difficulty of judging an individual’s understanding with  an instrument such as a survey. More Than One-Third of Homebuyers Understand the Differences between Home Inspections and Appraisals

About 36 percent of all homebuyers appeared to understand the differences  between appraisals and home inspections, according to our analysis of the  answers they gave to certain questions in our survey of recent buyers. For example, lower loan-to-value ratios are often associated  with better loan performance because the borrowers have more equity in  their properties than those with higher ratios. Because other factors have been shown to strongly predict loan  performance, simply comparing the foreclosure rates of borrowers who got  inspections with those who did not could be misleading. Enforcing Mandatory Home Inspections Would Pose Significant Challenges to FHA but Would Offer Varied Results for Homebuyers and Inspectors

The implications for FHA of mandatory home inspections mainly have to  do with the need to set national standards for inspections and the  resources FHA would need to enforce compliance with them. Consequently, according to FHA, its  sanctioning of appraisers was inconsistent. FHA officials said the agency currently does not have the human capital or  other resources it needs to enforce a home inspection requirement. Comments from the U.S. Department of Housing and Urban Development

Scope and Methodology for GAO Survey of Recent Homebuyers

	Overview

GAO conducted a general population survey of homeowners who closed on  their home purchases in calendar year 2002 to determine:  (1) how many  recent homebuyers got home inspections, (2) what recent buyers report as  the primary benefits and drawbacks of the inspections, (3) the extent that  recent homebuyers understand the differences between appraisals and  inspections, and (4) by what means buyers develop their understanding of  these differences. (See app. Scope and Methodology

To determine the extent to which getting a home inspection might affect  the performance of FHA-insured loans, we reviewed a random sample of  loan files for FHA-insured mortgages originated in fiscal years 1996 through  1999 to (1) determine whether the buyer(s) got a home inspection and what  credit score(s), if any, the lender considered in underwriting the loan and  (2) assess the reliability of selected key data elements whose original  source(s) are the documents in the loan file and which FHA provided us  from its electronic databases. How many? HOME INSPECTION.
Why GAO Did This Study

In the 1990s, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) dealt with a series of instances where buyers had not been notified of serious problems revealed by their appraisals. This led to several reforms, some of which allegedly may have caused some buyers to forgo home inspections, confusing that service with appraisals. Advocates of mandating home inspections claim that FHA will benefit from fewer foreclosures, and buyers will benefit by avoiding homes with costly problems. GAO was asked to assess (1) how many recent FHA homebuyers got home inspections and what were the perceived benefits, (2) whether homebuyers understand the differences between appraisals and home inspections, (3) whether inspections are associated with loan performance, and (4) the implications of mandating home inspections.

What GAO Found

From its survey of recent homebuyers, GAO estimates 86 percent of those using FHA-insured mortgages in 2002 got home inspections. These buyers frequently reported the inspections to be positive and beneficial, but occasionally said the inspections had drawbacks, mainly related to their cost and quality. Home inspections do not appear to be associated with loan performance; other factors, such as borrowers' credit scores, are stronger predictors of how FHA-insured loans perform. Because of this, and because mandating inspections for all homebuyers could pose serious resource challenges for FHA, the marginal benefit of requiring inspections is questionable. One of the reasons often cited for getting a home inspection was to ensure there were no serious problems with the house. Homebuyers reported that two-thirds of inspections uncovered problems with homes. As a result, they benefited by being able to renegotiate their purchases. Buyers also reported inspections were worth as much or more than they cost and increased their confidence in their decisions to buy homes. Inspections are a more in-depth review of property condition than FHA appraisals, take longer, and more often give buyers the option to back out of a purchase. GAO estimates 36 percent of FHA homebuyers understand the differences between FHA's mandatory home appraisal and its recommended home inspection. For most of the remaining buyers, GAO was not able to determine definitively the extent to which they understood the differences. Finally, FHA officials believe mandating home inspections would be difficult to enforce because the agency lacks the human capital and other resources to do so effectively. FHA also might see its pool of higher risk borrowers grow, as some buyers go elsewhere for non-FHA financing options available to lower income buyers. Benefits experienced by survey respondents might carry over to all homebuyers, but a mandatory inspection could put them at a disadvantage in highly competitive markets.