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The FHA and HUD warn consumers that the appraisal is not to be considered a home inspection. It’s true that you certainly could buy a home without having it inspected, and while you’re at it you could also buy a car without test-driving it first.

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The FHA Appraisal Rule You Need to Know

June 8, 2019

The FHA Appraisal Rule You Need to Know
If you are a first-time home buyer, you may not know the FHA home loan appraisal process or what it means to have an appraisal done. The FHA and HUD warn consumers that the appraisal is not to be considered a home inspection; it’s true that you certainly could buy a home without having it inspected, and while you’re at it you could also buy a car without test-driving it first.

The appraisal process is a tool for the lender and not the borrower; the purpose of the appraisal is to help the lender establish the fair market value of the home and insure it meets minimum requirements. A home must also live up to state/local building code.

But what happens if the appraisal comes in and the value is lower than hoped for? Or if it comes back with required repairs or other improvements? Does the seller or the lender get a do-over on the appraisal in such cases?

HUD 4000.1, the FHA loan handbook, tells us that a do-over appraisal is not permitted unless there are problems (‘material deficiencies”) with the original.

Your lender is “prohibited from ordering an additional appraisal to achieve an increase in value for the Property and/or the elimination or reduction of deficiencies and/or repairs required”.

If there are material deficiencies with the original appraisal, the lender is required to observe that the deficiencies fall into one of the following categories:
  • Any failure to report readily observable defects.
  • An appraiser’s use of “outdated or dissimilar comparable sales” when more recent and/or comparable sales were available.
  • What the FHA defines as “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.    
Again, the appraisal cannot be done a second time without justification from one of the three above causes. A basic disagreement over the valuation of the property is not enough to warrant a new appraisal.

In cases where a new appraisal is permitted, borrowers should expect this process to add more time to the loan approval procedure and your closing date and other milestones may be affected accordingly.

State law and other variables may also affect how this process is carried out, talk to your lender to learn more about how the details as they pertain to that financial institution.

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