I am often asked what condition the property needs to be in so that it will pass an FHA appraisal. The answer is not a simple one because it depends on two separate processes, objective minimum standards and subjective interpretation. For example, below I will give a specific list of numerous acceptable and unacceptable deficiencies that can appear in the property. Approved FHA appraisers are instructed by HUD to report all property deficiencies that are readily observable and may fall under one of these lists. But of course the lists below are not exhaustive and so the appraiser must use prudent judgment in determining what could be interpreted as a deficiency and represents a potential marketing or safety issue.
Additionally, making things even more complex is that HUD also charges FHA approved lenders with responsibility to exercise professional judgment and prudent underwriting practice in assessing when a condition within the property may create an issue of marketability or safety. Therefore, even if the appraisal comes back in “as is” condition and not “subject to repairs”, the lender’s underwriter has the right to request that certain deficiencies be corrected prior to closing. Because there is a considerable amount of subjectivity, don’t be surprised to find some properties may be declined for FHA financing by one lender and approved by another.
The lists below are compiled from HUD MORTGAGEE LETTER 2005- ML-48, but again I would like to caution that as with practically every facet of this industry, guidelines are in constant flux and subject to modification at any time.
Summary: 3351. (a) Annually, on or before June 8, the tax collector shall publish a notice of impending default for failure to pay taxes on real property, except tax-defaulted property and possessory interests, the taxes, assessments, penalties, and costs on which will have not been fully paid by the close of business on the last business day of the fiscal year. Five years or more after the property has become tax defaulted, the tax collector shall have the power to sell and shall attempt to sell in accordance with Section 3692 all or any portion of tax -defaulted property that has not been redeemed (Sec. 3691).
A. As-is Value. A separate appraisal (Uniform Residential Appraisal Report) may be required to determine the as-is value. However, the lender may determine that an as-is appraisal is not feasible or necessary. In this instance, the lender may use the contract sales price on a purchase transaction, or the existing debt on a refinance transaction, as the as-is value, when this does not exceed a reasonable estimate of value.
Further, on a refinance transaction, when a large amount of existing debt (i.e., first and second mortgages) suggests that the borrower has little or no equity in the property, the lender must obtain a current as-is appraisal on which to base the estimated as-is value.
On a refinance, the borrower may have substantial equity in the property to assure that no further down payment is required on the new loan amount. In some cases, the borrower will not have an existing mortgage on the property. In this case, the lender should obtain some comparables from a real estate agent/ broker to estimate an approximate as-is value of the property.
Another way of establishing the as-is value is to obtain a copy of the local jurisdiction tax valuation on the property.
B. Value After Rehabilitation. The expected market value of the property is determined upon completion of the proposed rehabilitation and/or improvements.
For a HUD-owned property an as-is appraisal is not required and a DE lender may request the HUD Field Office to release the outstanding HUD Property Disposition appraisal on the property to the lender to establish the maximum mortgage for the property. The HUD appraisal will be considered acceptable for use by the lender if: (1) it is not over one year old prior to bid acceptance from HUD; and (2) the sales contract price plus the cost of rehabilitation does not exceed 110 percent of the “As Repaired Value” shown on the HUD appraisal. If the HUD appraisal is insufficient, the DE Lender may order another appraisal to assure the market value of the property will be adequate to make the purchase of the property feasible. For a HUD-property, down payment for an owner-occupant or non-profit organization is 3.5% of the accepted bid price (sales price) of the property.
Recently Acquired Properties
Homebuyers who purchase a property with cash can refinance the property using 203(k) within six (6) months of purchase, the same as if the buyer purchased the property with a 203(k) insured loan to begin with. Evidence of interim financing is not required; the mortgage calculations will be done the same as a purchase transaction. Cash back will be allowed to the borrower in this situation less any down payment and closing cost requirement for the 203(k) loan. A copy of the Sales Contract and the HUD-1 Settlement Statement must be submitted to verify the accepted bid price (as-is value) of the property and the closing date.
Fred Sweezer Sr
Certified Home Inspector
Hud Approved Compliance Inspector T477
Certified 203K HUD Consultant S0712