March 7, 2011
The FHA loan process includes an appraisal of the property to be purchased. This appraisal is performed by an FHA approved professional and the loan cannot move forward without it. The appraisal is a critical part of the process for two reasons–it establishes that the property meets the FHA minimum property requirements and establishes a fair market value for the property. Once the fair market value is known, the FHA loan amount can be approved, provided the borrower has meet all FHA requirements for creditworthiness and other factors.
FHA Appraisal Fact–The Borrower Pays For The Appraisal
The FHA allows the lender to charge the borrower for the FHA appraisal. This is a standard part of the loan process. There are many reasons why this cost must be handled by the FHA loan applicant, but one of the most important things about an FHA appraisal is the impartiality of the process. If the lender pays for the appraisal, the potential exists for an appearance of impropriety. How can the buyer trust an appraisal that the lender has bought and paid for? While it is true that the lender may order and pay for property appraisals for its own needs, the FHA’s appraisal is not paid for by the financial institution.
FHA Appraisal Fact–The FHA Does Not Establish Appraisal Fees
FHA appraisal fees are, much like the properties for sale themselves, influenced by local market conditions including the typical cost of an appraisal in that market. According to the FHA, “HUD believes the marketplace best determines what is reasonable and customary in terms of establishing fees for appraisal services. Fees are established and negotiated between the FHA Roster Appraiser and the client…”
FHA Appraisal Fact–Impartiality Must Be Maintained
FHA rules state clearly that appraisal fees must never be determined based on anything other than value for services rendered. A fee must not be determined based on the outcome of the appraisal. “Results-based” appraisal fees are illegal and cannot be tied to a specific value or event such as FHA loan approval.
The FHA takes impartiality seriously. In another section of the rules, lenders are prohibited from allowing commissioned staff to hire FHA appraisers when those commissioned employees have a financial interest in closing the deal. The FHA rules say, “FHA approved lenders are now prohibited from accepting appraisals prepared by FHA Roster Appraiser who were selected, retained or compensated in any manner by a real estate agent, mortgage broker, or any member of the lenders staff who is compensated on a commission basis tied to the successful completion of the loan…”
FHA Appraisal Fact–Appraisal Management Companies Are Not Required
According to the FHA rulebook, “FHA does not require the use of AMCs or other third party organizations for appraisal ordering…” It’s important to note that this does not prohibit the use of an AMC. Some lenders may choose to deal with AMCs to maintain the impartiality of appraisals and avoid even the hint of a gray area in the appraisal process.
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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