FHA 203(K) Loan Appraisal Guidelines and Requirements
The complete information related to 203 (k) appraisal guidelines and requirements are presented in an easy to understand manner here. FHA (Federal Housing Administration) 203(k) Loans provide mortgage financing for the purchase or refinance of a owner-occupied residential property along with any necessary funds needed for the renovation or rehabbing. A real estate appraisal performed by a FHA approved appraiser is mandatory. A good understanding of the FHA mandated 203k appraisal guidelines can make the process of getting a 203k rehab loan a smooth one. A list of HUD approved appraisers is available on the FHA website. These approved appraisers are usually well versed in all the appraisal requirements necessary for a streamline 203k residential rehab mortgages. In addition to the FHA requirements, the 203k mortgage lender may want additional steps or processes to be performed by a residential real estate appraiser.
The residential property valuation procedures to be followed when underwriting a section FHA 203 (K) insured loan must be based on the detailed appraisal and valuation guidelines outlined in the HUD Handbook 4150.1. The specific requirements, variations and exceptions specific to 203k guidelines are explained below.
Steps prior to the 203 (K) Appraisal
Before the appraiser completes the 203k loan appraisal, a detailed work write-up must be provided to him. This report is mandatory and it can be based on the borrower’s own estimates or can be obtained from an approved 203k cost consultant. All professionally qualified and approved list of 203k rehab work consultants can be found on the website of HUD (Housing and Urban Development). For the cost consultant to conduct the site review to ensure compliance with the 203k guidelines mentioned in the handbook, the fees to be paid to him can’t be arbitrary and they should follow the 203k consultant fee schedule guidelines. Prior to the visit by a HUD approved plan reviewer, the utilities in the subject residential property must be turned on. If this is not the case, then the contingency reserve amount will be 25%.
The appraisal report provided by HUD approved appraiser must present an “as completed” value. This value factors in all the repairs and rehab/renovation work to be performed on the residential property. This estimated “as completed” appraisal value is used by the underwriter in determining the loan amount for the 203k loan. A lot of confusion prevails in the minds of borrowers and also real estate professionals regarding the steps followed by the lender to determine the maximum loan amount on a FHA-insured 203(K) renovation mortgage.
The valuation procedures to be used are clearly defined in the 203(K) loan appraisal guidelines. To determine the maximum loan amount on a 203-k mortgage, the valuation analysis requires two separate appraisal packages in the format of Uniform Residential Appraisal Report.
The following set of criteria is used to determine the 203(K) maximum loan amount that can be made on a property to be renovated.
A) As-Is Value [value of the property in the current condition] Appraisal Report
If the property to be purchased is a HUD owned foreclosed property then the “as is” appraisal report is generally not mandatory according to the FHA 203(K) Guidelines related to appraisals. The loan underwriter may just request the HUD office to release the property disposition appraisal report inorder to determine the maximum mortgage amount on a 203k insured loan for a HUD owned single-family home.
The following conditions have to be satisfied inorder for a HUD appraisal to be acceptable:
- The section 203(K) appraisal must have been performed within the last 12 months from the date of bid acceptance
- The total amount after adding the contract sales price and proposed eligible repairs must not be be more than 110% of the “as repaired value” mentioned on the origianl HUD property appraisal.
In cases where these conditions aren’t met, the mortgage lender’s underwriter may just order a new appraisal to accommodate the loan amount backed by the property’s market value.
For other properties the “as is” appraisal report will not factor in any repair requirements in valuation analysis. The value according to the current condition of property is presented in this report. In many cases, the loan underwriter may determine that there is no need for a “as is” value appraisal report. In such cases, the 203k lender might use the contract sales price for purchase transactions and use the existing debt (1st and 2nd mortgage amounts) for a refinance transaction as the “as is” value. To use either of these criteria, the underwriter should feel that the underlying property supports the estimated valuation.
When it comes to refinance transactions involving the FHA 203 k insurance program, the specific appraisal requirements for “as is” value will be based on the existing mortgage loans of the borrower on the property. If the borrower has little or no equity, then in almost all cases the FHA loan underwriter will choose to obtain a current “as is” value through a qualified FHA approved appraiser to underwrite the 203(K) streamline mortgage. In situations where the borrower does indeed have a substantial equity or no debt, the prudent underwriter will just obtain a few recent comparable sales in the vicinity of the property’s locality from real estate professionals or an appraiser. A copy of the local tax valuation of the property might also suffice.
B) As Completed Value [value of the property after the necessary renovation work and repairs] Appraisal Report
Unlike the “as is” appraisal report, this appraisal will factor in all the proposed rehabilitation works and improvements to be made on the single-family or multi-family (up to 4 units) residential home. This value will be based on the “subject to repairs, improvements, alterations, etc.
Property Market Value in Neighborhoods Undergoing Rehabilitation
203(K) insurance program is utilized by many community redevelopment initiatives to rehab and renovate residential properties in entire neighborhoods. Appraisers when determining the market value of the property are allowed to factor in the full impact of such initiatives on the value. These initiatives can be either be public or private led initiatives. To determine the fair appraisal value of a property located in a neighborhood undergoing revitalization, the appraiser is allowed by the 203K guidelines to look for comparable sales in other neighborhoods that have undergone similar rehabilitation.
The total appraisal fee charged by the lender for a 203k appraisal (both “as is” and “ARV” (After Repair Value)) can be no more than one-and-half times the amount that is permitted to be charged for a proposed construction appraisal for a FHA section 203(B) loan. This fee is usually established by the local HUD field office where the residential property is located.
203(K) Lender’s Appraisal Staff
Eligible and qualified 203k lenders are allowed to use their own staff to perform all the necessary steps involved in the rehab loan process. The appraisals, field inspections, review of architectural exhibits etc may be performed by the lender employed or associated staff, provided they all have the necessary qualifications and are approved by HUD. The complete list of professional staff including 203k appraisers and eligible 203(K) lenders can be found on the FHA website.