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HUD & FHA Appraisal Rules

by K.C. Hernandez

As predecessor to the Department of Housing and Urban Development, the Federal Housing Administration follows HUD guidelines. HUD and FHA appraisal guidelines are one and the same, as the FHA became an agency within HUD in 1965. The FHA insures loans made to approved lenders, reimbursing their losses if borrowers default. HUD pays lender claims with FHA insurance reserves funded by borrowers. Only appraisers with prior HUD approval are qualified to participate in FHA programs.

The Basics

Flexible income and credit qualifying guidelines lead first-time buyers, borrowers of modest means and homeowners with minimal equity to seek FHA-insured loans. Despite its flexibility, the FHA has strict standards for the properties that act as collateral for its loans. As an opinion of value, appraisal results vary by appraiser and may be evaluated differently by different lenders; however, HUD maintains benchmark standards which FHA appraisers and lenders abide by to gain insurance endorsement.

Value

One function of the appraisal report is to determine a property's value. The lender relies on the appraisal to ensure it finances no more than 96.5 percent of the home's value. Appraisers compare a property to neighboring homes -- ideally, located within one mile and sold within the past three months -- with similar characteristics. The appraiser takes into account favorable and unfavorable features which increase or decrease its desirability when determining its value. He also consider the home's use, its design and condition in his analysis.

Appraisal Types

An appraisal may be completed as-is or subject-to repairs. Loans used for refinance and purchase are typically evaluated in their as-is condition and may include recommendations for repairs. Subject-to repairs apply to properties under construction or homes that have yet to be rehabilitated under the FHA's Section 203k insurance program. Such homes are evaluated based on their anticipated value when all improvements are complete.

Repair Requirements

The appraiser, and subsequently the lender, requires repair of property defects that affect the occupants' health and safety. Using HUD's minimum property standards as a benchmark, the FHA appraiser denotes structural and mechanical problems. The lender may then require repair of the items as a condition of loan approval. Items that require repair include: active termite infestation, hazardous chemicals on site, lead-based paint, cracked foundation, roof leaks, faulty plumbing and electrical systems and non-functioning appliances.

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