10 things appraisers are now being asked to do for FHA appraisals

Have you heard FHA made some changes recently to their appraisal manual? That’s right. The new FHA 4000.1 Handbook went into effect on September 14th, 2015, and it has stirred quite a bit of conversation and emotion among appraisers. Even agents have expressed fear that appraisers will now be calling for more repairs. In my opinion most of the changes have more to do with how appraisers write their reports rather than new items to look for during an inspection. Let’s scan a few of the changes below to get a general sense of the new manual, but realize it’s nearly impossible to talk through every single change. Have a read and let me know what you think.

FHA changes - image purchased and used with permission from 123rf dot com

10 things appraisers are now being asked to do for FHA appraisals

  1. The Appraiser MUST: FHA has introduced more definitive language for appraisers by highlighting the word “must”. This theoretically helps HUD be more clear about their expectations. For instance, the manual says, “The appraiser MUST operate all conveyed appliances and observe their performance”, and “The appraiser MUST note and comment on all onsite hazards and nuisances affecting the property”.
  2. Observation vs. Inspection: The appraisal “inspection” is now called an “observation” instead of an “inspection”.
  3. Angled Photos: When possible, appraisers MUST take comp photos at an angle to show the front and side of the house. If you didn’t know, this is how appraisers take front photos for the subject property during a FHA appraisal, but it’s now also the case for comps.
  4. Legal Nonconforming: If a property has a legal nonconforming zoning, the appraiser MUST comment whether it can be rebuilt as improved. Of course it’s not always easy to get this type of information, and sometimes cities or counties might even charge $100+ to say whether the property can be rebuilt as is (this is often called a “burn letter”). Remember that appraisers won’t pay for this type of information, so lenders, AMCs, and/or buyers are going to need to obtain this information in a timely manner so the appraiser can do his/her job.
  5. Provide Legal Documents: An appraiser should have a preliminary title report and TDS (disclosure statement in California) for a FHA appraisal since FHA says the mortgagee MUST provide “any other legal documents contained in the loan file” to the appraiser. We all know that rarely happens. Sometimes an AMC may not have all the information, but other times certain documents might be withheld on purpose for whatever reason. Will this actually happen? We’ll see.
  6. Full Attic (Maybe): Appraisers will need to fully access the attic and crawl space if there is space available to do so. If the appraiser cannot observe the full attic, a “head and shoulders” view should suffice. Appraisers have already been required to do a “head and shoulders” inspection at the least. If the attic is fully finished, the appraiser can do the inspection of the entire space, but if it’s not, appraisers won’t be walking on 2x4s in the attic and having legs break through the ceiling (they shouldn’t be doing that anyway).
  7. Airport Contour Maps: FHA is asking appraisers to review airport contour maps and comment on the marketability of the subject being near an airport. You may be wondering what the heck an airport contour map is (like many appraisers). Well, it’s a map that basically shows noise levels surrounding an airport. The old FHA manual actually stated the appraiser must review contour maps, but the new manual takes it a step further to ask the appraiser to do reporting on the map or any issues. Old Handbook: “Appraisers must identify affected properties, review airport contour maps and condition the appraisal accordingly.” New Handbook: “The Appraiser must review airport contour maps and analyze accordingly. The Appraiser must determine and report the marketability of the property based on this analysis.”
  8. Two Years of Roof Life: The appraiser MUST report if the roof has less than two years of remaining life, and make the appraisal subject to inspection by a professional roofer. This is actually an interesting requirement since appraisers probably aren’t qualified to say whether a roof definitively has less than two years or roof life or not. Isn’t that the job of a roofer?
  9. Consider Three Approaches: If you didn’t know, there are three approaches to value in an appraisal report. Appraisers often only use the Sales Comparison Approach (analyze comps), but there is also the Cost Approach and Income Approach. FHA is saying appraisers must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant. This doesn’t mean appraisers are required to complete all three approaches to value in the appraisal, but they do need to at least consider the approaches and do them if they are relevant. I have heard the real estate community say things like, “The Income Approach is now required for FHA”, but that’s not really true. An Income Approach would only be required if the appraiser determines it is relevant for the assignment.
  10. Sump Pump: This is a good point to end on since it highlights that appraisers are ultimately being asked to be more descriptive in their reports. The appraiser MUST notify the mortgagee if the sump pump is not properly functioning at the time of appraisal. This is an interesting issue. How is the appraiser supposed to determine if a sump pump in a basement is working or not? “Hey Mr. Owner, do you mind bringing the hose into the basement so we can do a little test?”  🙂

Do you feel a little stressed? If so, that’s normal. It will take a little while for appraisers to get used to these changes, and it will take some adjusting for the rest of the real estate community too. Again, most of these changes have to do with actually writing the appraisal report instead of what happens during the appraisal inspection observation. DOWNLOAD the new FHA 4000.1 Handbook HERE.

DOWNLOAD an FHA inspection checklist HERE (pdf) (made a few months ago, but still relevant for today despite the manual changing)

Possible Impact of these FHA Changes:

  1. Ripple: In recent years conventional appraisals have seemingly been on a trajectory to become more like FHA appraisals, so there may be more required of appraisers for conventional loans in coming time.
  2. Fees: It’s possible that some appraisers will charge more for FHA assignments since there is more work involved.
  3. Rejection: It’s also possible that some appraisers will simply choose not to accept FHA assignments because of the extra work and/or liability.
  4. Agents Be Ready: It is going to be important for real estate agents to be aware of some of the things appraisers need during a transaction so turn-times don’t have to be extended needlessly. For instance, if an appraiser needs disclosure statements (called a TDS in California) or a “burn letter” (a letter stating the property can be rebuilt as it is),  agents may be able to help track down that type of information. Or if an appraiser is going to observe the attic, be sure your seller knows to remove personal belongings under the scuttle so the appraiser can do the observation.

Questions: Any other changes you want to mention below? Did I leave anything out? What other impact might these changes bring? I’d love to hear your take.

UPDATED POST: This post was updated to further explain what a TDS and “burn letter” are (I had questions via email and on Facebook).

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  1. Steve says

    i have heard that appraisers are also going to be asked to check all windows to make sure they open and shut and work propery. Is that true?

    • says

      Hi Steve. My understanding is that FHA has always required appraisers to open and close a representative number of windows to be sure they work properly. I haven’t heard anything new in this regard for the updated manual, though I am open ears if someone has the inside scoop. Thanks.

  2. says

    Nice review of the changes Ryan. It will be interesting to see how things shake out in the end. I was listening to a HUD webinar and there were questions that appraisers had that the HUD workers did not know the answer to, so there may be some revisions to clarify issues that are unclear.

    • says

      Thanks, Tom. That’s interesting to hear that HUD did not know the answers. I do wonder some of their rationale here about some of these additions. As a friend said via email this morning, on one hand HUD is saying appraisers are not doing an “inspection” but instead an “observation”, yet ironically the appraisal is becoming more like a home inspection. On a minor note I am curious why the angled photos are required for comps. What does that give HUD? Maybe it is their way of getting appraisers to take original photos instead of use MLS photos?

      • says

        You’re probably right on the comps photos. I think they are trying to make sure that appraisers are doing what they are suppose to. They said numerous times on the post cast that they know some appraisers were only doing a “15 minute” appraisal and they want to make sure that the necessary time is spent in the home and observing it adequately.

        • says

          Agreed. Some of the “requirements” are actually things they seem to be saying, “Hey, we know you’ve been faking it, but now we expect you to be legit.” Off the top of my head I think of highest and best use as well as the Cost Approach. Tightening regulations are still a reminder of the reaction from the previous real estate “bubble” bursting. The pendulum has swing dramatically and continues to swing.

  3. Dave Koch says

    Hello Ryan, I am in the mortgage business now but I am also a recovering appraiser after 20 years in the appraisal business. Everything I’ve seen about the so-called new regulations seem to be a regurgitation of the old rules to me. Just because they now say “must” doesn’t really change anything. Even before “must” appraisers knew or should have know that “should” or “is to” means “must”. I do like the sump pump dilemma though. What a joke HUD is. The disconnect between HUD policy makers and reality becomes clearer every time they “clarify” things.

    • says

      Thanks Dave. I appreciate your take very much. I hear what you are saying. I would guess part of the reason for MUST is because some appraisers maybe weren’t doing what the manual said in the first place. That’s just a hunch. I hope you’re enjoying the mortgage side of things. I bet your background as an appraiser comes in useful (and I bet many LOs seek you out for questions too). Thanks again.

  4. Ramona says

    Our home is fully fenced (with padlocked gates) and the only door from within house to backyard is alarmed and sounds when opening. Do we still need additional fencing around pool to pass an FHA refi inspection?
    Ramona, Visalia Ca.

  5. Jess says

    Quick question, I’m looking at an “as is” property with an active underground oil tank. Is it possible to get a 203k loan with the tank still there?

    • says

      Hi Jess. Thanks for reaching out. As far as I know FHA will allow an active oil well (or underground storage tank) as long as there are no issues with marketability and contamination and such. See some of the language of HUD below so you can get a sense of what the appraiser might call out depending on his/her observations:

      “The appraiser must note and comment on all hazards and nuisances affecting the subject property that may endanger the health and safety of the occupants and/or the structural integrity or marketability of the property, including: subsidence, operating and abandoned oil and gas wells, abandoned wells, slush pits, heavy traffic, airport noise and hazards, runway clear zones/clear zones, proximity to high pressure gas, liquid petroleum pipelines or other volatile and explosive products, residential structures located within the fall distance of a high-voltage transmission line, radio/TV transmission tower, etc., excessive hazard from smoke, fumes, odors, and stationary storage tanks containing flammable or explosive material.

      If hazards or nuisances are observed, the appraiser must describe the condition(s) and make a requirement for repair and/or for further inspection, and prepare the appraisal “subject to repairs” and/or “subject to inspection” in the site section of the report. Supporting documentation provided by the appraiser may include extra photos or copies of site studies or analyses, property reports, surveys or plot plans, etc.”

  6. Kim says

    Hi Ryan,

    How is it possible to get clarification of the vague heating rules for an FHA inspection? My home is in Pasco County, Florida. There has been much confusion as to the exact heating requirements in order for the house to pass an FHA inspection. Is it possible that space heaters would pass? Thank you. From HUD: “Properties with electric heating sources must have an acceptable electric service that meets the
    general requirements of the local municipal

    • says

      Hi Kim. Thanks for asking. I highly doubt space heaters are considered a permanent heat source. Keep in mind it’s impossible for FHA to give one rule for heat that would apply everywhere in the United States. After all, a cabin in the middle of the forest won’t have central heat, so a wood-burning stove might be totally legitimate in the eyes of the market and the FHA appraiser for that area. Though if a wood stove was all a tract home had in Sacramento, that wouldn’t cut it because local code requires more and the market does not accept just a wood-burning stove as being adequate either. Thus I would say to call your local county or city and ask them what the requirements are for a permanent heat source. The building department is probably a good place to start. Ultimately we can expect to see FHA bow to local county and/or city/state guidelines since we are bound to see different guidelines throughout the country depending on the location (and the market). I hope that makes sense. Sorry I could not give you an exact list, but hopefully you can understand why the rules seem a bit vague. Thanks.

  7. Spedie says

    I am 3 weeks from close on my 6th home. I am doing a conventional loan with 20% down. My lender is selling the loan (they will only service it) after closing.

    Even though Conventional, I am held to HUD standards. I was informed today that underwriter says I MUST hire certified structural engineer to evaluate 12×12 front porch (poured as part of concrete foundation) and evaluate deck to make sure they are not interfering with structural integrity of the home. BTW, deck and porch are nice.

    WTF is going on here? I bought home #5 for cash and am shocked at lender requirements. What a circus!

    • says

      Hi Spedie. Thanks for reaching out. That’s interesting to hear you are being held to HUD standards on a conventional loan. I’m not sure why. Lending guideines have become VERY strict in the past years though. I will say it is worth noting structural integrity and safety are a big deal for conventional and FHA loans. We like to talk about “health and safety” being something exclusive to FHA, but that’s not the case.

      What caused the underwriter to wonder about structural integrity? Was it something in the appraisal report? Or was it something in the purchase contract, disclosure statements, or some other document? The underwriter may have seen something in writing that is triggering this. I might recommend asking why this is being required. If nobody called for the repairs, then it’s a wonder if the underwriter had negative issues in the past and is now projecting those experience on the current deal. Or maybe the underwriter is aware of settling in the neighborhood or some other issue. Keep in mind if an appraiser saw abnormal cracks and such, the appraiser would be right to call for a qualified professional to check it out.

      For what it’s worth, structural engineers can be very expensive, but there are some that have realized they can make a buck here and there by charging a nominal fee to go by a property and send in a letterhead stating everything is clear. For instance, there is a local guy that maybe charges a few hundred bucks at the most for these types of issues (this is a great savings compared to thousands of dollars). If you have to do the dance so to speak, maybe your agent can reach out to the real estate community to see if someone like this can be found to help you save money.

      Best wishes.


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