April 18, 2018
There are several reasons why a borrower might decide to switch FHA lenders during a home loan transaction. In cases where the switch happens, borrowers should know certain FHA guidelines that can affect the transaction-especially if an appraisal has already happened.
Some borrowers think about switching lenders because they have had an unsatisfactory experience. Others may simply be offered a better deal. But there are some instances where the borrower is tempted to switch lenders because of an appraisal issue-namely that the appraisal did not value the property as expected.
In such cases, when a borrower is tempted to get a new lender and a new appraisal, what should be known about that process?
The first thing borrowers should know is that new FHA appraisals are not possible simply because there is a dispute over the results. The FHA loan rules in HUD 4000.1 do not allow a second appraisal to be ordered just to see if different results are possible.
When Is A New FHA Appraisal Is Possible?
FHA loan rules specifically prohibit ordering a new appraisal just to get a new valuation. New appraisals are possible under the right circumstances, usually where the competency of the appraiser or completeness of the work are involved. FHA loan rules say “material deficiencies” in the appraisal are grounds to request a new one, but disputing the dollar amount of the property valuation process alone is not sufficient.
HUD 4000.1 Definition of Material Deficiencies In the Appraisal
Material deficiencies on appraisals are considered to be “those deficiencies that have a direct impact on value and marketability” according to the FHA loan handbook. Material deficiencies include, but are not limited to the following:
- Failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house;
- Reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal;
- Fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client.
If you are considering moving to a new FHA lender because she won’t request another appraisal, you should know the lender’s actions are bound by lender standards and the FHA loan handbook; HUD 4000.1 instructs the lender, “A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter (underwriter) determines the first appraisal is materially deficient and the Appraiser is unable or uncooperative in resolving the deficiency.”
In any situation where the original lender is justified in ordering a second appraisal, the cost of that procedure cannot be passed onto the borrower. “The Mortgagee must fully document the deficiency and status of the appraisal in the mortgage file. The Mortgagee must pay for the second appraisal.”
In cases where the borrower moves on to a second lender, similar appraisal rules apply. We’ll examine what happens when you transfer an FHA loan to a new lender in a future blog post.
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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