December 28, 2017
FHA rehab loans have different appraisal requirements than FHA “forward” mortgages used to simply purchase an existing-construction property.
Because the borrower is applying for a home loan to buy property that (likely) does not meet FHA minimum standards or state/local building code, the lender is required to determine both the existing condition of the home and the “after completion” version of it.
What do FHA loan rules say about the appraisal process for this type of home loan transaction? Today we’re examining the rules for the FHA 203(k) rehab loan. We’ll cover rehab loan rules for properties in federally declared disaster areas in a separate blog post.
FHA Appraisal Rules For 203(k) Rehab Loans
As mentioned above, FHA loan handbook (HUD 4000.1) requires the lender to determine the value the property as-is, not just what it will be like once the rehab work is done. Page 376 instructs the lender:
“The Mortgagee must establish both an Adjusted As-Is Value and an After Improved Value of the Property.”
But does that mean the lender will order two appraisals? HUD 4000.1 tells us:
“An appraisal by an FHA Roster Appraiser is always required to establish the After Improved Value of the Property.” Except for situations that involve refinancing or where FHA property flipping rules are applicable, HUD 4000.1 states that “the Mortgagee is not required to obtain an as-is appraisal”.
That’s not to say that the lender cannot obtain an appraisal for the as-is condition, but there are other ways to determine the pre-improvement value of the property. HUD 4000.1 gives the lender the option to consider either the purchase price less any inducements to purchase or the As-Is Property Value “as determined by an FHA Roster Appraiser” in cases of forward mortgages.
For refinance loan transactions, the required procedure is determined by how long it has been since the property was acquired. HUD 4000.1 has a section titled, “Properties Acquired Greater Than or Equal to 12 Months Prior to the Case Assignment Date” which includes the following instructions to the lender:
“The Mortgagee must obtain an as-is appraisal to determine the Adjusted As-Is Value when the existing debt on the Property plus the following items exceeds the After Improved Value:
-Financeable Repairs and Improvement Costs;
-Financeable Mortgage Fees;
-Financeable Contingency Reserves; and
-Financeable Mortgage Payment Reserves (for Standard 203(k) only).”
Furthermore:
“The Mortgagee has the option of using the existing debt plus fees associated with the new Mortgage or obtaining an as-is appraisal to determine the Adjusted As-Is Value when the existing debt on the Property plus the following items does not exceed the After Improved Value:
-Financeable Repairs and Improvement Costs;
-Financeable Mortgage Fees;
-Financeable Contingency Reserves; and
-Financeable Mortgage Payment Reserves (for Standard 203(k) only).
There’s also a section titled, “Properties Acquired Less Than 12 Months Prior to the Case Assignment Date” which specifies that in such cases an as-is appraisal is required, and the adjusted value of the home is the “as-is” property value.
In transactions where the borrower has taken ownership of the property within 12 months of the case assignment date “by inheritance or through a gift from a Family Member”, the lender “may utilize the calculation of Adjusted As-Is Value for properties acquired greater than or equal to 12 months prior to the case assignment date”.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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