Presented by:
Thomas M. Munizzo, IFA
Chief Appraiser and Compliance Officer
IRR-Residential
(913) 261-1880
tom.munizzo@irr-residential.com

The following questions were submitted by appraisers and underwriters after the latest changes made to FHA appraisal protocol this year and used as a supplement in a 7 hour FHA appraisal seminar. All answers provided were reviewed by a number of past & present chief appraisers on the technical staff at various homeownership centers in addition to the single family policy division in Washington D.C. Please refer to the 4150.2 HUD Handbook and appendix D for more details on the questions and answers below.

1. I am appraising a condo and the condo complex is not on the FHA condo approved list, now what? Is this a spot loan and if so what does that mean?

A spot loan means exactly that; the lender will have to obtain information regarding the condominium development and apply to HUD to preliminary approve this loan until the entire project becomes HUD approved and is assigned a condominium approval number. Some of the questions which will be required are: Does any entity own a large percentage; Is there a mandatory HOA fee with a non severable interest; is there a condominium or homeowners association board; how much are the monthly assessment fees and are they sufficient and typical of the market.

2. In HUD’s handbook, they address properties that back to high voltage transmission lines and require that the property be outside of the designated fall zone. On their web page, they imply that as long as the property is outside of the easement it is OK. What does HUD actually require for properties that back to high voltage transmission lines?

The appraiser must indicate whether the dwelling or related property improvements is located within the easement serving a high-voltage transmission line, radio/TV transmission tower, cell phone tower, microwave relay dish or tower, or satellite dish (radio, TV cable, etc.). If the dwelling or related property improvements are located within such an easement, the DE Underwriter must obtain a letter from the owner or operator of the tower indicating that the dwelling and its related property improvements are not located within the tower’s (engineered) fall distance.

3. HUD states that properties with kitchens in the basement are not allowed. How about inverted raised ranches, which have the kitchen below grade?

HUD does not specifically state basement kitchens are not allowed, but local code and the type of kitchen will typically dictate the legality here. Kitchens in inverted raised ranches would be acceptable and I would also recommend for the FHA appraiser to comment whether or not any functional obsolescence exists as a result of this arrangement and if this impacts the value on the property in anyway. Likely, the appraiser will also use inverted raised ranches for comparables.

4. Does HUD require grounded outlets or ground fault outlets? Is so when would they be required and where would they need to be placed in the residence?

HUD does not required ground fault outlets. Local code supersedes and typically the town will require them if the home is new construction. Old HUD guidelines required them near all water sources, (kitchen, baths, utility sinks etc).

5. Are DE underwriters required to have any training whatsoever to underwrite FHA loans?

Each homeownership center provides training opportunities for lenders and their underwriters. It is the lenders responsibility to train their underwriters especially since the lenders are also held accountable for the quality of the FHA insured loan.

6. If I am a certified licensed appraiser, can an associate licensed appraiser (trainee), complete an FHA appraisal that I can sign off on as the Supervisor?

NO! NADA! NOT IN THIS LIFETIME! NEVER EVER!

7. Am I allowed, under FHA guidelines, to turn in a FHA appraisal assignment to my client without the FHA case number included on the report?

The answer to this question should be simple but unfortunately, it isn’t. Technically, you should not even start the assignment without the case number and by submitting the file to the client without it, puts you at risk. HUD directs the appraiser not to submit the appraisal without including the FHA case number.

8. While performing my inspection of the property I discover serious issues that I feel need to be reported. Since there no longer is a VC sheet, where am I supposed to address these issues?

Appendix D of the 4150.2 handbook explains where all valuation condition issues need to be reported in the appraisal report.

9. Follow up question. Does the appraisal need to be ‘SUBJECT TO” the repair or correction of these issues?

YES, if these repairs were essential to eliminate conditions threatening the continued physical security, safety and soundness of the property.

10. On a purchase transaction, what do I do if the seller’s disclosure statement reports repair issues or other serious problems with the subject property?

Condition the appraisal report accordingly. Also, see the answers to questions 8 & 9 above.

11. How about lender pressure to “make a number”? Can I report them to HUD? Where do I report the problem?

HUD has made available a 24/7 hotline to report lender pressure. If pressured by an FHA lender to inflate an appraisal to meet a predetermined value, FHA Roster appraisers should contact the HOC with jurisdiction at 1-800-255-5342. Make sure you have the property address, case number, lender information with a detailed explanation of the complaint so a HUD representative can follow-up.

12. When the roof of a house is covered in snow, should we still state that “although a head and shoulders visual inspection in the attic did not yield obvious signs of moisture or leakage, the appraiser was unable to state with certainty the remaining economic life of the roof due to it being covered in snow”?

This is overkill…simply state, “The roof was snow covered”. It also limits liability. If it is unreasonable to expect the snow to clear within a reasonable amount of time, the appraiser may access the condition of the roof by observing the roof from the interior. The lender may also require additional requirements to satisfy this condition.

13. Does HUD have any specific type of language they want us to use when addressing environmental issues such as mold?

NO.

14. Does HUD still want us to check on the reverse mechanism of garage doors?

YES.

15. Lead-based paint. I still go around and around with processors on this one, as they seem to think that when the VC sheets went out the window, so did the requirements for scrape and paint. When is the appraiser required to make the appraisal SUBJECT TO scraping and Painting?

On any defective paint surfaces pre 1978, or post 1978 where exterior finish is otherwise unprotected.

16. Follow up question. What if they just paint over the old paint and don’t scrape?

It depends on the severity of the peeling paint. Technically, they have encapsulated it by simply painting, so it could be acceptable, unless it still requires scraping.

17. Follow up question. What if they leave all the scraped paint chips on the ground around the property? Must I require them to remove them?

YES, they pose a safety hazard.

18. Follow up question. Is an Extraordinary Assumption required?

Not unless you think the soil has been contaminated by the loose paint chips.

19. Follow up question. Are there additional inspections required to see if the work has been completed and if so on what forms are these inspections reported?

There may be, it depends if the lender actually makes them correct the deficiency. If they do, they do not have to use you to do the final. They can use anyone they determine has competency to complete the inspection. Typically, it is the original appraiser but sometimes the lender will use a FHA compliance inspector or an employee from the broker may do it. They should be using the 92051 compliance inspection form unless they were cosmetic or non HUD required repairs.

20. Follow up question. What if the required repairs are not performed?

If you are performing the inspection you must state that the repairs have not been completed. If the lender uses someone else to inspect the property it is no longer the appraiser’s problem.

21. Do we still look for smoke alarms? How many should there be and where should they be placed?

Although FHA strongly recommends them, smoke detectors are not a nationwide HUD requirement at this time. The 203(k) rehabilitation program requires that smoke detectors be installed adjacent to sleeping areas.

22. Do we still comment on broken/cracked window panes?

YES.

23. Follow up question. Do they have to be repaired?

Only if they affect the health and safety, security, soundness and structural integrity of the property.

24. Do we still need handrails for three or more stairs?

Not unless the appraiser feels it poses a safety hazard. See question #73 for additional direction.

25. Are CIR’s still going to be used for verification that repairs have been completed? Since the appraiser is commenting on the condition of the property, and the lender is the one calling for the repairs, please clarify what will be used for evidence that work has been completed?

The Compliance Inspection Report (CIR), form HUD-92051, will be used by the appraiser to report whether or not required repairs have been completed. If the lender required a repair as the result of an inspection, or through information obtained other than the appraisal, the lender may use whatever they deem appropriate to document compliance with inspection or certification requirements. This form states that it expired as of 12/31/07. HUD will have to correct this problem in the future.

26. Follow up question. Can the above repair items be escrowed, and rectified after closing?

Typically NO because escrowed items are usually weather related and these would not be impacted by the weather.

27. The subject has building code violations (perhaps an un-permitted addition, electrical wiring that appears shoddy, etc); how are these treated in the URAR, and by FHA?

See questions 8 & 9 above.

28. Are there any conditions that would halt the appraisal in its tracks? Perhaps being within the engineering fall height of a tower, or within so many feet of a high pressure gas valve?

You betcha! How about a 2 unit mixed use property where the first use commercial exceeds 49% of the GLA? When you encounter properties that have unacceptable locations or which clearly demonstrate will not be eligible for FHA financing reject the property.

29. Follow up question. Who do you contact, and what do you turn in, if anything?

Notify the DE Underwriter and submit your pictures with your supporting documentation from the 4150.2 HUD handbook.

30. Who are the intended users of an FHA appraisal?

The intended user of the appraisal report is the lender/client and HUD/FHA. THIS LANGUAGE NEEDS TO BE INSERTED IN ALL OF YOUR FHA APPRAISAL REPORTS.

31. Are there any special USPAP – related considerations when performing FHA appraisals?

USPAP does not specifically address any FHA requirements.

32. Is an FHA appraisal inspection a home inspection?

NO!

33. Follow up question. How can appraisers protect themselves from a homeowner’s mistaken assumption on this issue?

HUD requires the lender to provide to the borrower “the appraisal is not a home inspection form” on all purchase transactions. It would also be advisable to clearly define that your walk through is not to be considered a home inspection and that you were only observing readily visible conditions.

34. Who should the appraiser contact if they suspect fraud (or other irregularities) during the appraisal assignment? The state? The client? HUD?

Use the hotline number at 800CALLFHA which is 800-225-5342. I would also notify the DE underwriter and your state licensing board.

35. What is FHA 203k, and are the appraisal requirements different for a 203k assignment?

See 4150.2 Handbook – Appendix B – Special Programs.

36. What is an FHA case number, who generates it, where does the appraiser place the number on an appraisal report?

The FHA case number is a reference number for tracking FHA loans. It goes in the upper right hand corner on the appraisal report and the lender generates it through CHUMS.

37. How long is the lifespan of an FHA appraisal?

An FHA appraisal has a six month lifespan.

38. I performed an FHA appraisal for Client A. Now Client B calls me and wants me to put their name on the appraisal. Can I change the name to the new lender?

Simply tell Client A to transfer the case # to Client B which is commonly called a case reassignment. You can not change the name on the appraisal.

39. The utilities are not on at time of inspection. Should the appraiser make the appraisal SUBJECT TO the utilities being turned on?

YES because HUD requires the appraiser to test a representative sample of all mechanical systems including plumbing, electrical and heating/cooling systems. If no utilities were on then the appraiser could not adequately satisfy his/her scope of work requirements, specifically, perform a complete interior inspection.

40. Follow up question. What it the property is a vacant HUD owned property?

See answer to question 38 above.

41. The subject is not habitable. A detailed list of required repairs (i.e. cost-to-cure) is not readily available. The lender asks the appraiser to prepare a list of all the necessary repairs and provide an approximate cost to complete these repairs. Should the appraiser comply with this request?

YES, this is required by HUD see Appendix D page 34.

42. My lenders always ask me to provide a cost to cure when I condition the appraisal on items FHA requires. Is this an FHA requirement?

YES, the appraiser must indicate the extent of repairs and note this in the appropriate section of the appraisal, or in the “additional comments” section, or in an addendum, under the heading of “Reconciliation – Required Repairs” listing the repairs noted together with an estimated cost to cure.

43. Are drive-by appraisals acceptable for FHA assignments? If so, what extra conditions are there?

NO, FHA does not accept drive-by appraisals.

44. What are the current FHA loan limits?

Approximately $410,000 for Chicago metro areas.

45. Will the FHA accept an appraisal with an extraordinary assumption?

YES.

46. Now that the VC sheets are no longer part of an FHA appraisal assignment, do I still have to do all the things that were required on the VC sheets?

With exception to cosmetic items…YES, review the FHA quick tips section.

47. Where can I get a 4150.2 HUD Handbook?

Online at www.hudclips.org/

48. Is the 4150.2 HUD Handbook free since I am an FHA appraiser?

YES. It is free online to anyone.

49. Does FHA notify appraisers when they are placed on the approved appraisal roster?

NO, only if you are not approved. You will have to go online to monitor your approved roster status.

50. Does FHA require the appraiser to consider any personal property that will stay with the property?

NO. If a sale involves personal property it should be identified and excluded from the valuation.

51. My mortgage broker client will not provide the FHA case# to me until I provide them with my opinion of value. What should I do?

Do not comply with this request. Find another client. Report this client to the FHA hotline number.

52. Do HUD compliance inspectors still exist?

YES.

53. Do you have to be a HUD compliance inspector to do a final inspection on new construction?

NO, but whomever does the final needs to be competent enough to recognize that the work was done in a satisfactory manner.

54. Is there any difference in appraising a new construction home when it is less than 90% complete vs. over 90% complete?

YES, less than 90% complete constitutes marking the “subject to completion” box. Over 90% complete constitutes marking the “subject to repairs” box.

55. What are the FHA guidelines on smoke detectors and carbon monoxide detectors in reference to Illinois law? Does Illinois law override FHA requirements?

FHA does not require smoke detectors. Local code ALWAYS supersedes HUD reporting requirements.

56. VA has said we do not need to go into crawl spaces or attics anymore. What does FHA require?

FHA is not VA, you still must inspect these areas.

57. Are termite reports for homes still automatically required?

FHA no longer mandates automatic inspections for wood destroying insects or organisms in existing properties (over one year old). However, pest inspections are required if, there is evidence of active infestation, it is mandated by the state or local jurisdiction, it is customary to area, or at the lender’s discretion. Prudent underwriting would dictate an inspection in areas prone to wood destroying insects or organisms.

58. What about ground fault outlets in the kitchen and bathrooms? What about homes that use Romex or BX for electrical wiring instead of metal conduit?

No longer required by HUD, however these items may be required by local code. Local code will always supersede HUD requirements.

60. Does HUD still want the monthly taxes and insurance cost reported in the appraisal report?

NO.

61. What does HUD require to be in an appraisal report when a neighborhood is described as declining?

HUD does not require specific language. The do require the appraiser to provide support in the Market Condition section of the appraisal report if the DECLINING box is checked. HUD expects the appraiser to have completed sufficient analysis to reach this conclusion. I would also recommend a comment if any negative time adjustments were made. Refer to Mortgagee letter 2007-11.

62. When there is a deficiency, such as peeling paint, how is it to be addressed in the appraisal report?

My understanding is that we are to identify deficiencies; however, we are not allowed to require repairs.

Although we have answered this question on different levels this is really the confusing part of the latest changes. Bottom line, if you go to a property and there are obvious deficiencies which impact the property that pose to be a hazard then you must condition the report on remediation of that negative condition. If the deficiency is cosmetic or likely not to pose a problem then you can mark the appraisal “AS IS” but comment about the deficiency.

“The appraisal process is the lenders tool for determining if a property meets the minimum requirements for eligibility standards for an FHA insured mortgage. Underwriters bear primary responsibility for determining eligibility; however, the appraiser is the on-site representative for the lender and provides preliminary verification that the general acceptability criteria standards have been met.”

63. What does HUD require to be in an appraisal report when a neighborhood is described as having an oversupply of active listings?

See answer to question #60.

64. Previously HUD required a cost approach to value when a property was developed within the past two-years. Is this still a requirement or is the development of the cost approach left to the appraiser’s decision as to weather it is relevant or not?

HUD does not require the cost approach anymore. However, if the subject property is new construction (less than one year old), or the cost approach is recognized in the market as the basis for pricing, the appraiser may complete the cost approach.

HUD directs the appraiser to complete the cost approach if; the property is a unique property, has specialized improvements, is manufactured housing, or client requests the cost approach to be completed.

On a side note; the appraiser is always to state the remaining economic life as a single number or as a range. This must be completed for every FHA appraisal whether or not the cost approach is completed. An explanation is required if the remaining economic life is less than 30years.

65. If an appraiser completes the cost approach, do they still use form 1007 or has it too been eliminated?

The Marshall & Swift Square Foot Appraisal Form, form 1007, has not been eliminated. It is still in use.

In those instances where the cost approach is employed, FHA feels the use of the newly revised forms together with the guidance provided in Appendix D is sufficient to produce an accurate and adequately supported cost approach.

66. Does HUD still require that the use of fuses in an electrical panel be identified in the appraisal report?

No, not unless they pose an electrical hazard or are insufficient for the electrical needs of the home.

67. Is a well located in the basement okay? If not allowed by FHA, what if local laws permit it?

An existing property, which is serviced by a well located within the foundations walls of the dwelling, is acceptable as security for FHA-insured financing only when the local jurisdiction recognizes and permits such a location. A well located within the foundation walls of new construction is not acceptable except in arctic or sub-arctic regions.

68. Does the appraiser determine what inspections are required or does the lender determine that?

Mortgagee Letter 2005-48 provides examples of property conditions that will continue to require automatic inspections. The appraiser should be noting what inspections, if any, are customary for the area, required by state or local law, or that are recommend based on observed property conditions.

Lenders must review the appraisal to determine whether the appraiser has reported any property conditions that affect the health and safety of the occupants, or the security and the soundness of the property, and must require immediate repair or inspection where the property condition poses a threat to these criteria.

69. Are oil tank certifications still required for underground tanks with no evidence of surface contamination?

The presence of an underground storage tank (UST) does not automatically trigger a certification. The appraiser is to note if there is any surface evidence of USTs. Further analysis or testing is required where the appraiser notes any readily observable surface evidence of leakage from a UST. If there is readily observable evidence of on-site contamination, the appraiser must make a requirement for further inspection in the site section of the report.

The lender should require further analysis in those instances where a UST exists and the source of heating fuel is other than that provided by the UST, i.e. electric, natural gas, etc., to make sure the tank has been properly abandoned. FHA defers to the underwriter to employ prudent underwriting in requiring any tests or certifications based on reported property conditions.

70. Where does the appraiser insert Remaining Economic Life on the condo form to comply with FHA reporting requirements?

It is to be entered in the Reconciliation section of the form 1073 as a statement similar to that contained in the cost approach section of the other three FHA approved forms, i.e. “Estimated Remaining Economic Life ______ Years.”

71. Can you please provide a definition of Accessory Dwelling Unit?

The accessory unit is defined as a habitable living unit added to, created within, or detached from a single-family dwelling that provides the basic requirements for living, sleeping, eating, cooking, and sanitation. Accessory Dwelling Units (ADUs) are commonly understood to be a separate additional living unit, including separate kitchen, sleeping, and bathroom facilities, attached or detached from the primary residential unit, on a single-family lot. ADUs are usually subordinate in size, location, and appearance to the primary unit and may or may not have separate means of ingress or egress. Attached units, contained within a single-family home, known variously as “mother-in-law apartments,” are the most common type of accessory dwelling unit.

Accessory units usually involve the renovation of a garage, basement, or small addition to a single family home. If they generate income, they are not considered accessory units, but a second unit.

72. If the Accessory Dwelling is on a separate meter, does it then become a 2-unit property?

An accessory dwelling unit may or may not have separate services. However, Appendix D of the 4150.2 handbook states that “An accessory apartment must be connected to the utilities (except telephone, television and cable) of the dwelling unit and may not have separate services.”

If the second unit is rented it would be considered a 2-unit dwelling. The determination of whether or not an ADU is a second unit will be made by the appraiser in the site analysis section of the report where zoning, highest and best use, and legal use are addressed.

73. The subject property is an up and down two-unit dwelling with common utilities. The top unit is rented. Do we have an accessory unit or a small income producing property?

HUD defines this as a two-unit dwelling which would require the form 1025, the Small Residential Income Property Appraisal Report. However, the appraiser must determine if the two unit property is legal or legal non-conforming based on zoning. If it turns out to be illegal, it is not eligible for a FHA insured mortgage.

74. It was stated that handrails and trip hazards are cosmetic. I don’t understand! Wouldn’t these items be health and safety issues?

The appraiser must always be mindful of health and safety issues and report what is readily observable. The missing handrails or trip hazards are property conditions that no longer require automatic repair for existing properties but should be reported by the appraiser. In these instances, lender discretion and prudent underwriting will determine whether or not a repair is advisable. For example, a stairwell or staircase comprised of eight (8) or nine (9) risers without a handrail would probably pose a safety risk.

75. Are private road maintenance agreements still required?

FHA is no longer requiring evidence of a joint maintenance agreement, recorded or otherwise, but still requires evidence of a permanent easement. The appraiser should ask if a maintenance agreement exists and comment on the condition of the private road or lane, especially if it is in inferior condition.

76. Please define “Readily Observable”.

“Readily observable” is defined as observations made by the appraiser of conditions that are immediately discernable and noticeable during the typical site visit. The appraiser is not required to move furniture, equipment or cause damage to the property.

77. What if I am unable to take the required photographs to show the front, rear and sides of the property because of shrubbery, topography, etc., what should he/she do?

The appraiser should make every attempt to take the required photographs. If not possible, the appraiser should so state on the appraisal report.

78. Handbook 4150.2 requires that the heating system must be able to maintain 50 degrees in all areas containing plumbing systems and that the system must be installed in accordance with the manufacturer’s recommendations. How will the appraiser know this?

This requirement pertains only to dwellings that use wood-burning stoves or solar systems. If the appraiser is unable to make the necessary determinations, he/she should so state on the URAR form by making a condition requirement. The lender may obtain a certification from a qualified firm that the system is properly installed to clear the condition requirement.

79. Please clarify the requirements for lead-based paint repairs on condominium units.

The lead-based paint requirements relate only to the unit being appraised, not to the entire project. Section 3-6A-17 of the Handbook will be revised to reflect this correction. However, the appraiser should always comment on the overall condition of the condominium project.

80. Why can’t appraisers use comparables over 12 months old, especially in rural areas where it is difficult to obtain comparables that are more recent?

A sale over 12 months old is not acceptable in the first three comparables. The appraiser should go to a competing neighborhood. An older sale may be used as a fourth or fifth comparable sale to supplement the three comparables, however, the search must be sufficient to capture comparables from the past 12 months.

81. Please give us instructions on reverse mortgage if any different from a regular appraisal. Any difference in the appraisal process or is it just the difference in the lending?

Good question! At one time there was a difference between the two programs regarding the appraisal process. The 203B assignment use to require the appraiser to identify all cosmetic repairs and condition the appraisal accordingly. The reverse mortgage assignment never required the appraiser to report on cosmetic repairs. HUD has since removed the requirement for reporting cosmetic repairs on 203B assignments. Other than that, there are differences in the lending program itself which is invisible to the appraiser.

82. My question pertains to rural properties with outbuildings. Some of these properties have buildings that are pretty old, have tons of paint issues etc. One thing I have always done on a safety side is to have cistern (underground water collection vessels) lids welded or permanently secured down.

You are right on! Good job, but also remember that if these out buildings contribute to the value of the whole then you need to identify any deficiencies that they may have especially pre 1978 paint.