FHA Appraisals - What’s the Big Difference?
Joseph A. Hasson July 31st, 2008
A residential real estate appraiser produces a variety of appraisal reports that are specific to the property type, the value definition applied, and the client’s needs. For residential financing purposes, conventional or FHA, the appraisal of typically written on a standard 1004 Form report, also known as a Uniform Residential Appraisal Report (URAR).
Fundamentally, there is no difference between an appraisal report written for a conventional loan and one that is written for an FHA insured loan. Both display an “opinion of value” that represents Market Value. Starting in 2006, the FHA appraisal became the same URAR appraisal report used for conventional loans with the exception of a statement regarding the Intended User that reads, “to support the underwriting requirements for an FHA insured mortgage”.
So why do we perceive a difference between an FHA and a conventional appraisal report?
To know that, you need some knowledge of FHA history. Prior to 2006, an FHA report required two HUD forms to be included in all appraisal reports.
The first was HUD Form 92564-VC, which was a “Notice to the Lender” form also referred to as the “Valuation Conditions” or “VC” form. This form, with 14 sections, broke down the property into sub-categories including: site, soil, topography, site improvements (well and sewage), pests, access, structure, foundation, roofing, mechanical systems, health and safety, lead-based paint and specific requirements for condominiums and manufactured homes. In this form, the appraiser would check off the presence or absence of the various elements within each section. It was a tedious, but thorough analysis of a property that required the appraiser to scrutinize the property and report the findings on the VC Form.
The second was HUD Form 92564-HS, which was a “Notice to the Homebuyer” form. This form summarized the findings on the VC form into a palpable format. If there was a problem identified on the VC form, it was noted and explained on the “Notice to Homebuyer” form. Fortunately or unfortunately, depending on which appraiser you ask, these HUD forms were retired.
Also changed was the FHA requirement of reporting separate “As-Is” and “As-Repaired” values for properties that had observable defects, whether they were major defects, e.g. cracked or sinking foundation, roof leads, health and safety issues; or minor defects, e.g. missing handrails, cracked windows, worn out flooring. This “As-Is” and “As-Repaired” requirement created problems for everyone. It necessitated the appraiser to act as a contractor and determine a repair cost that was, for the most part, unsubstantiated. This requirement also caused significant delays in the delivery of the reports as well as an administrative nightmare.
Still confused as to what differentiates an FHA appraisal?
It all boils down to the underwriting requirements of FHA insured mortgage. The FHA requirements are different from those used for a conventional mortgage. These FHA requirements are stricter and may disqualify a home from the FHA program altogether. An example of a condition that would disqualify a home from the FHA program would be environmental contaminants, noxious odors, proximate location near an oil well, high-powered transmission lines, or anything that is clearly a health and safety violation.
Many requirements extend to a property’s eligibility for an FHA insured mortgage if not corrected or repaired. One example is the roof. A home may have a maximum of three layers of roofing. However, if more than two layers exist and repair is necessary or there is less than two years of remaining physical life, all of the old roofing must be removed as part of the re-roofing. Also, a home with a flat roof must be inspected by a qualified roofing inspector.
Another example are the private water and septic systems. They are allowable as long as they are functioning; meet the required setbacks and the requirements of the local health department. However, connection to public water and sewer must be made if the total cost to connect is 3% or less than the estimated value of the property. Furthermore, FHA requires that shared wells service no more than four properties and a shared well must have a shared well agreement in title and that agreement shall also be recorded in a deed or public records.
One more difference between the FHA and conventional appraisal are the reporting of the physical improvements, i.e. home or condominium. The most confusing of the guidelines is how the FHA considers gross living area (GLA). The GLA is the total area of above-grade residential space. Above-grade living space is the area above a crawl space or a basement. Finished basements or attics are not included in the GLA, however their existence, size, quality, and functionality are valued.
According to FHA requirements, basement space does not count as habitable space unless certain criteria are met. For example, basement bedrooms must have a window, the windowsill must be no higher than 44 inches from the floor, the window must have a clear opening of at least 24 inches wide and 36 inches in height and the window must be at ground level or higher or have appropriate window wells.
The above examples are just a few of the FHA requirements pertaining to single-family housing. There are many more FHA requirements and issues regarding eligibility. A copy of the FHA Handbook (4150.2), in Word or PDF format, is available on the HUD website.
Thanks for reading.