FHA Appraisal Rules for Transferring Lenders

March 27, 2018

There is a common question about FHA home loans regarding the specific rules for switching lenders. Imagine you apply for a cash-out refinance loan or other "appraisal required" mortgage on a property, and the appraisal comes in far lower than expected.

This would naturally affect the amount of cash back to the borrower based on the appraisal. The borrower is tempted to change lenders and see if a better deal can be found. But what do FHA home loan rules say about this procedure?

In essence, if you are looking to switch lenders in order to get a new appraisal that would be potentially more favorable to the transaction, FHA loan rules don’t allow you to get a replacement appraisal.

The FHA loan rules in HUD 4000.1 do not allow a second appraisal to be ordered for the sole purpose of getting a better result.

A New FHA Appraisal Is Possible Under Certain Circumstances

When switching lenders, or when addressing appraisal issues with your current lender, FHA loan rules specifically prohibit ordering a new appraisal except under the right circumstances, usually dealing with “material deficiencies” in the appraisal.

In cases where the borrower is still dealing with the original lender, HUD 4000.1 instructs the lender, "A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter (underwriter) determines the first appraisal is materially deficient and the Appraiser is unable or uncooperative in resolving the deficiency."

"The Mortgagee must fully document the deficiency and status of the appraisal in the mortgage file. The Mortgagee must pay for the second appraisal."

HUD 4000.1 Definition of Material Deficiencies In the Appraisal

Material deficiencies on appraisals are considered to be "those deficiencies that have a direct impact on value and marketability" according to the FHA loan handbook. Material deficiencies include, but are not limited to the following:

1. Failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house;
2. Reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal;
3. Fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client.

What happens when a new lender wants to order a second appraisal? We'll cover the FHA home loan rules for that scenario in another article.

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