With the interest rates no longer at 2-3%, many home buyers, home owners and realtors are beginning to expand their options and are dealing with the FHA appraiser again for the first time in a while.
This post is all about the many things the FHA appraiser is looking for that you may not even be aware of…. til now.
The FHA appraiser is becoming a thing again…. woohooo!!
The interest rates are no longer super low and the silver lining is that your financing options have been expanded…. thank goodness, right?
As an FHA appraiser myself, I am giving you the insider info on what you need to know to be fully prepared for the FHA home appraisal.
You are going to learn about all what FHA is, to how long the FHA appraisal is good for, and more.
After you learn about all of these important FHA facts, you are going to be a pro and extra prepared when the FHA appraiser arrives at your house.
This post is all about the many things the FHA appraiser is looking for that you may not even be aware of…. until now.
How To Think Like the FHA Appraiser
There are many misconceptions about FHA so I think it’s important that we begin with a super quick understanding about what exactly is FHA….
What is FHA?
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders.
The history of how FHA began is very interesting and reading about it will help clear up common misconceptions.
FHA insures mortgages on single family homes, multifamily properties, residential care facilities, and hospitals.
These mortgages are made by lenders throughout the United States and its territories.
HUD (The US Dept of Housing and Urban Development) oversees the FHA.
HUD’s mission is: “to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination, and transform the way HUD does business.”
To qualify for FHA insurance, loans must meet certain requirements.
The FHA appraiser plays a key role in this process.
What is the FHA Appraiser looking for during the appraisal inspection?
FHA Appraisers must be on the approved roster and are bound by rules above and beyond USPAP and GSE’s (government sponsored entities) such as Fannie Mae, Freddie Mac and Ginnie Mae.
In our own reports we have replaced the words “inspection” with “observation” since the FHA appraiser is not a home inspector and may only report on readily observable property deficiencies or adverse conditions.
- Example: We do not climb on the roof to determine it’s condition but, if we are standing outside and can see broken, missing or curling roof tiles or notice dampness or staining inside the house then, we do need to ask more questions, report this deficiency, and recommend an expert to inspect and repair/replace as necessary.
The FHA appraiser must observe, analyze, and report that the Property meets HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).
MPR refers to general requirements that all homes insured by FHA be safe, sound, and secure.
MPS refers to regulatory requirements relating to the safety, soundness, and security of New Construction.
The 3 S’s the FHA Appraiser is focusing on: Safety, Soundness and Security
SAFETY refers to the health, habitability and sanitary condition of the property.
- Regardless of the appraiser’s suggested repairs, the Mortgagee will determine which repairs are required.
- Typical required repairs include: peeling or chipped paint on homes built prior to 1978, missing or loose handrails at stairways, missing or improper spacing of balusters for decks or porches, exposed electric wiring and/or missing outlet covers, broken or missing windows.
- Cosmetic repairs are not required – but still must be noted and consider their impact on condition and value.
SOUNDNESS relates to the structure and structural components of the dwelling.
- For example: foundation problems such as shifted or bowed walls, large settlement cracks, water damage, roof defects, decks or additions that appear unsafe.
SECURITY refers to the property’s marketability to serve as collateral for FHA insurance.
- Some items that affect the marketability could include close proximity to a noisy road, high voltage power lines, a hazardous site, airport or railroad tracks.
What are the MPR’s and MPS’s?
Minimum Property Requirements and Minimum Property Standards form the basis for Identifying the deficiencies of the Property that the FHA Appraiser must note within the appraisal report.
Here is a very brief summary of what we look for: (because the FHA 4000.1 Handbook is over 1500 pages long!)
- Legal Requirements – Property is a single, marketable real estate entity (does not have a secondary plot contributing to the use and marketability, is Fee Simple (absolute ownership unencumbered by any other interest or estate) or Leasehold Interest (the land is leased). *Specific guidelines apply to PUD’s (development with an HOA) and Leasehold Interest.
- Legal and Land Use Considerations – Party or Lot Line Wall, Non-Residential Use of the Property, Zoning, Encroachments, Easements and Deed Restrictions.
- Externalities – refers to off-site conditions that affect a Property’s value. This includes heavy traffic, airport noise, airport hazards (runway clear zone, accident potential zone), high pressure gas lines, overhead electric power transmission and local distribution lines, smoke, fumes and offensive or noxious odors, stationary storage tanks
- If the Property is New Construction and is located within a Runway Clear Zone at a civil airport or Clear Zone military airfield, the Appraiser must note that the Property is ineligible for FHA insurance.
- High Pressure gas lines – must be located more than 10 feet from the nearest boundary of the pipeline Easement
- Stationary Storage Tanks – If the subject property line is located within 300 feet of an aboveground, stationary storage tank with a capacity of 1,000 gallons or more of flammable or explosive material, then the Property is ineligible for FHA insurance.
- Site Conditions – refers to access to the Property, onsite hazards and nuisances, topography, grading and drainage, suitability of soil, land subsidence and sinkholes, oil or gas wells, slush pits, flood zones, coastal barrier resource systems, lava zones, mineral, oil and gas reservations or leases, soil contamination and residential underground storage tanks.
- Onsite Hazards and Nuisances refers to conditions that may endanger the health and safety of the occupants or the structural integrity or marketability of the Property.
- Oil or Gas Wells – The Appraiser must notify the Mortgagee if the dwelling is located within 75 feet of an operating or proposed well. The distance is measured from the dwelling to the site boundary, not to the actual well site. *Abandoned wells have additional rules.
- Slush Pits – If the Property has a Slush Pit, the Appraiser must make the appraisal subject to the removal of all unstable and toxic materials and the site made safe.
- Required minimum distance between Wells and Sources of Pollution vary depending on several factors.
- New Construction Site Analysis – The Appraiser must obtain a fully executed form HUD-92541, Builder’s Certification of Plans, Specifications, and Site, signed and dated no more than 30 Days prior to the date the appraisal was ordered, before performing the appraisal on Proposed Construction, Properties Under Construction or Properties Existing Less than One Year. The Appraiser must review the form and analyze and report any discrepancies between the information provided by the builder and the Appraiser’s observations.
- Excess and Surplus Land
- Excess Land refers to land that is not needed to serve or support the existing improvement. The highest and best use of the Excess Land may or may not be the same as the highest and best use of the improved parcel. Excess Land may have the potential to be sold separately.
- Surplus Land refers to land that is not currently needed to support the existing improvement but cannot be separated from the Property and sold off. Surplus Land does not have an independent highest and best use and may or may not contribute to the value of the improved parcels.
- Required Analysis and Reporting:
- The Appraiser must include the highest and best use analysis in the appraisal report to support the Appraiser’s conclusion of the existence of Excess Land. The Appraiser must include Surplus Land in the valuation.
- If the subject of an appraisal contains two or more legally conforming platted lots under one legal description and ownership, and the second vacant lot is capable of being divided and/or developed as a separate parcel where such a division will not result in a non-conformity in zoning regulations for the remaining improved lot, the second vacant lot is Excess Land. The value of the second lot must be excluded from the final value conclusion of the appraisal and the Appraiser must provide a value of only the principal site and improvements under a hypothetical condition.
- Characteristics of Property Improvements – requirements for a living unit, access to a living unit, non-standard house styles, modular housing, identifying an accessory dwelling unit, additional manufactured home on property, lease equipment components and mechanical systems.
For more details about MPR and MPS (and there are LOTS MORE) go to:
https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1
tap the link “FHA’s Online Housing Policy Library” and search “mpr”
How does the FHA appraiser determine square footage of the house?
Although FHA does not require the appraiser to use a specific standard of measuring, it would be fair to say that most appraisers will use the ANSI standard for 2 reasons:
- to satisfy Fannie Mae requirements.
- to remain consistent in their methods to avoid confusion or misleading appraisals.
Also, FHA does require specific items to be labeled, disclosed and reported in a certain way when providing a sketch within the FHA report.
Condominiums
FHA will approve loans on condos as long as they meet specific guidelines.
The FHA appraiser will be gathering information to help the lender determine whether or not the applicant will be able to qualify for the FHA loan.
Here are just a few items for starters:
- For condos located within the approved FHA condo list the project must have an Owner Occupancy Percentage of at least 35% of the total number of Units.
- For condos NOT located within the approved FHA condo list the project must have an Owner Occupancy Percentage of at least 50% of the total number of Units.
- For Condominium Projects with 20 or more Units, the Individual Owner Concentration is 10% or less
- For Condominium Projects with fewer than 20 Units, the Unit owner may not own more than one Unit.
Do FHA Appraisals expire?
HUD refers to this as the FHA validity period.
The estimated value provided in the FHA appraisal report stays with the property for 180 days.
An update to the report will extend the estimated value up to one year. (so long as the property value has not declined)
The above timeframes also apply to HECM (Home Equity Conversion Mortgage) also known as Reverse Mortgages.
The above timeframes also apply to Servicing and Loss Mitigation (delinquent mortgage loans…)
If the property is located within a PDMDA (Presidentially Declared Major Disaster Areas) where a damage inspection report reveals property damage, the estimated value is extended up to one year.
Please see Mortgage Letter 2022-11 for more details.
The info provided in this blogpost is as of 01/09/2023.
The FHA Handbook is constantly being updated.
– be sure to stay on top of the changes!
More FHA Resources:
Answers to FHA Frequently Asked Questions
Search the (FHA) Single Family Housing Policy Handbook 4000.1 (SF Handbook)
Appraisal Report and Data Delivery Guide
Searching the handbook can be tricky – please feel free to reach out and I will be happy to help you find the answers to your questions.
This post is all about the many things the FHA appraiser is looking for that you may not even be aware of…. until now.
