October 18, 2016
We get many questions about FHA appraisals, and there are some critical issues to keep in mind when considering this mandatory part of the FHA loan process.
A home to be purchased with an FHA mortgage loan must pass an FHA appraisal, which is intended strictly to assess the fair market value of the home and insure the property meets FHA minimum standards. Note the use of the use of the word, “minimum”. Appraisals are NOT intended as INSPECTIONS of the property.
A home that passes an FHA appraisal is not guaranteed to be free of problems, and the FHA makes it clear that borrowers should not accept the appraisal as any sort of stamp of FHA approval.
In all cases, a borrower purchasing a home with an FHA mortgage should pay for the optional, but very important home inspection. Those who do not pay for a home inspection won’t get financial or legal help from the FHA if the home is appraised but later found to have defects or problems.
But in some cases, an inspection or even the appraisal itself may not be possible right away. For example, what happens if a borrower applies for an FHA 203(k) or 203(h) rehab loan? Such loans are available for both purchase and refinances, so the borrower who is buying and rehabbing a property may well wonder how the appraisal process works in such cases.
HUD 4000.1 addresses this issue. The FHA loan rulebook begins by defining what minimum property requirements are for the purpose of the appraisal. “Minimum Property Requirements (MPR) refer to general requirements that all homes insured by FHA be safe, sound, and secure.” There are also minimum property standards (MPS), which are defined as, “regulatory requirements relating to the safety, soundness and security of New Construction.”
HUD 4000.1 states that in general, “When examination of a Property reveals noncompliance with the Property Acceptability Criteria, the Appraiser must note all repairs necessary to make the Property comply with HUDs Property Acceptability Criteria, together with the estimated cost to cure. If the Appraiser cannot determine that a Property meets HUDs MPR or MPS, the Mortgagee may obtain an inspection from a qualified Entity to make the determination. Mortgagees must use professional judgment in determining when inspections are necessary to determine that a property meets MPR or MPS.”
How is this possible for an FHA rehab loan? “If the Mortgage is to be insured under the 203(k) program, the Mortgagee must confirm that the Property will comply with the following eligibility criteria upon completion of repairs and improvements.” Appraisals for structures that already exist in their “completed” state are done prior to loan approval, but appraisals for rehab projects would have to wait until the property can be viewed as it is intended to be lived in.
As you can tell from the above, much depends on the state of the property AFTER the rehab/repair work is complete. Borrowers who need to know more about how the process works for FHA rehab loans should speak to a loan officer about their specific needs.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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