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HUD

What type of heater is needed for a loan?

March 22, 2018 By Ryan Lundquist 28 Comments

A guy wants to sell, but his central system is broken, so he has space heaters in each room. Does that work? Is it going to fly for a loan? What’s an appraiser going to be looking for when it comes to a heat source? Let’s consider some thoughts from Fannie Mae, HUD, local code, and different lenders.

First, as a quick refresher, appraisers are required during a loan to list what type of heat source is present. Appraisers typically turn on the heater during a FHA or VA transaction to be sure it is working, whereas that is not usually required during conventional financing (sometimes it is).

1) FHA

Quick FHA summary: In short, the heat source needs to be able to heat the house to 50 degrees at minimum and it should be automatic. The word “automatic” means it needs to work without someone making it work for an extended period of time. A plug-in space heater isn’t going to cut it because it can’t heat the entire house. Likewise, it’s not going to work for an owner to say, “My central system went out, but I have a fireplace, so we’re all good.” Nope.

Straight from FHA: FHA/HUD 4000.1 (Page 518) states “The Appraiser must examine the heating system to determine if it is adequate for healthful and comfortable living conditions, regardless of design, fuel or heat source. The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the permanently installed heating system does not:

• automatically heat the living areas of the house to a minimum of 50 degrees F;
• provide healthful and comfortable heat or is not safe to operate;
• rely on a fuel source that is readily obtainable in the subject’s geographic area;
• have market acceptance within the subject’s marketplace; and
• operate without human intervention for extended periods of time.”

2) FANNIE MAE

Quick Fannie Mae summary: Fannie talks about how heating and other improvements need to conform to the neighborhood and have market acceptance. This means one dude might be fine with a plug-in space heater or his boy scout fire-starting skills, but that’s probably not acceptable in the market. See #4 below with some more thoughts about lenders and Fannie Mae.

Straight from Fannie Mae: B4-1.3-0.5 states, “The improvements should conform to the neighborhood in terms of age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood or with the requirements of the competitive market because of adequacy of plumbing, heating, or electrical services; design; quality; size; condition; or any other reason directly related to market demand, the appraiser must address the impact to the value and marketability of the subject property.

3) LOCAL CODE & ADVICE

Local code: Standards from Fannie Mae and HUD are really important, but we also have to know the local market. For instance, Sacramento County does NOT allow portable space heaters as the main heat source (I’m guessing most areas are like this). There are also requirements for temperature, so if a wall heater, central system, or baseboard system can meet those requirements, then you’re all good.

Practical Advice: If you have a broken system and you’re planning to install a heater that is less traditional, I recommend talking with your loan officer to be sure the underwriter is going to sign off. If an appraiser has already visited the home, you can ask the appraiser what type of systems tend to be acceptable in the market too. Keep in mind appraisers aren’t building inspectors, so they’re probably not going to give specific advice such as the number of baseboard heaters needed to meet code (ask the building department). Also, if you’re wanting to use an alternative type of heat that is technically code compliant but not really used in the market, I’d strongly recommend you talk with your loan officer and appraiser first.

Straight from Sacramento County Code: “When the winter design temperature in Table R301.2(1) of the 2010 CRC is below 60*F (16*C)  every dwelling unit shall be provided with heating facilities capable of maintaining a minimum room temperature of 68*F (20*C) at a point 3 feet above the floor and 2 feet from exterior walls in all habitable rooms at the design temperature. The installation of one or more portable space heaters shall not be used to achieve compliance with.”

4) DIFFERENT RULES:

Real estate is hardly ever black and white, which means a strict rule in one place might not necessarily apply to every location or with every lender either. Thus we might see a rural home with nothing but a pellet stove obtain financing because it’s common for that market (which an appraiser would know). But it would be a marketability issue if we saw a house with a pellet stove (and no other system) in a suburban tract neighborhood where everything else has a central system. In that case I imagine most lenders would require a type of heat source that is common for the suburban tract market.

I asked Matt Gouge, a loan officer, to pitch in some thoughts from the perspective of Mountain West Financial:

Freddie and FNMA do not have any specific guides in reference to a properties’ heat source. The main guide FNMA references in their selling guide is B2-3-01 General Property Eligibility. The key is that the home is safe, sound and structurally secure and suitable for year-round use. The requirement of a permanent heat source can vary from lender to lender and geographic locations. A general guide followed by most lenders in the local area defines a permanent heat source as a heating unit appropriate for the GLA of the dwelling, hard-wired into the electrical system of the home and thermostatically controlled. Baseboard heat would be acceptable but must be hard-wired and thermostatically controlled, and it has to produce the appropriate amount of heat for the gross area of the living space. A portable type of heater, a wood burning or pellet stove are not considered a permanent heat source.

I know it’s frustrating to talk about rules that don’t apply everywhere, but then again real estate is not the same for every location, climate, bank, etc… So the rules aren’t always the same either.

I hope that was interesting or helpful.

Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: appraiser guidelines, Fannie Mae, Fannie Mae heat guidelines, FHA, FHA heat guidelines, heat source, HUD, local code, Matt Gouge, permanent heat source, space heaters in sacramento county, what is required as a heat source for a loan

How do you know if it’s a second unit or an accessory dwelling unit?

June 17, 2014 By Ryan Lundquist 32 Comments

Is it a second unit or an accessory dwelling? How do you know the difference? If the post office gives the second structure an address, that makes it a second unit, right? Or if the dwellings are separately metered, it must mean there are two units. Let’s talk through some distinctions below, and then discuss a bit of a “monkey wrench” since there is an added subjective layer when making this call.

accessory dwelling unit in sacramento - by home appraiser blog

Accessory Dwelling:

  • Not recognized by city or county as a second unit (sometimes it is though)
  • The market does NOT consider it a second unit
  • Probably does not contribute as much to value
  • Inferior to the main unit in size and location (maybe quality too)
  • Has kitchen, bathroom and sleeping area
  • May or may not be separately metered
  • May or may not have a separate address
  • May or may not be attached to the main house

Second Unit:

  • Recognized by city or county as a second unit
  • The market recognizes it as a second unit
  • Likely contributes more substantially to value
  • Zoning allows two units
  • It is probably separately metered
  • Most likely has a separate address
  • May or may not be inferior in size and location to the other unit
  • May or may not be attached to to the main unit

two houses on one lot - by home appraiser blog

The Short Answer: A second unit and an accessory dwelling might look like the same thing to a casual observer, but what matters most in determining whether a structure is a second unit or accessory dwelling is what zoning allows and whether the market perceives the structure as a second unit or not. The post office might have a separate address for an accessory dwelling, but that does not make it a legal and legitimate second unit. The utility company might have two meters on site also, but even that does not mean there are two units. The key comes down to the property being legal as two units in the eyes of the city or county, recognized by the market as a second unit, and even how the dwelling contributes to value.

Fannie Mae language on second unitsThe Monkey Wrench: Part of determining whether something is an accessory dwelling or second unit comes down to its contributory value, and the appraiser is really going to have to give this some thought. For instance, some counties might legally consider any secondary structure as a second unit despite its size or how much value it really adds. But just because a city or county declares something is a second unit does not mean it should be appraised as a duplex (2 houses on 1 lot is considered a duplex). For instance, imagine Placer County considers a property with a 4500 sq ft house and a 300 sq ft detached studio as a duplex. But are these really two units? Don’t you think the added value would be fairly minor for the 300 sq ft studio? A property like this should probably be appraised as a single family residence with an accessory dwelling instead of two separate units (a duplex). While there may be two units technically in the eyes of the county, the 300 sq ft studio is hands-down really seen as an accessory dwelling by the market. In fact, some buyers wouldn’t hardly care about the small accessory dwelling because they are purchasing the property for the main house instead of whether there there is a 300 sq ft studio or not. Imagine a different scenario where there are two houses on one lot, but one is a complete tear-down. If one unit is beyond repair, it’s probably best for this property to be appraised as a single family residence because that’s how the market would see the property (instead of as a duplex). This is where a subjective element comes into play because appraisers have to consider how much value a secondary structure adds, and how the market sees that structure.

HUD logoWhat FHA says about Accessory Dwellings: An accessory dwelling unit (ADU) is defined as a habitable living unit added to, created within, or detached from a primary single-family dwelling and contained on one lot. ADU’s are commonly understood to be a separate additional living unit, including kitchen, sleeping, and bathroom facilities. ADU’s are subordinate in size, location, and appearance to the primary home and may or may not have separate means of ingress or egress. An attached unit contained within a single-family home, also known as a “mother-in-law apartment,” or a “garage apartment” that may or may not be attached to the primary residence are the most common types of accessory dwelling unit. An accessory dwelling unit sometimes involves the renovation of a garage, basement, or a small addition to a primary residence. The determination of whether or not an ADU is a second dwelling unit is to be made by the appraiser and indicated in the site analysis section of the report where zoning, highest and best use, and legal use are addressed. The fact that an ADU is rented or generates income should not categorically result in a determination that the property contains two dwelling units.

fannie mae What Fannie Mae says about Accessory Dwellings: An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property (Page 583 of Fannie Mae Seller’s Guide).

Why does this matter? If there are two units, the appraiser will be comparing your two units with other two-unit properties. If you have a house with an accessory dwelling, the appraiser will be comparing your house with other homes with accessory dwellings. Keep in mind an accessory dwelling unit is NOT considered square footage if it is separate from the main living area, so it won’t be included in the total square footage of the main house (though it can still add to the value).

NOTE on Local Requirements: There may be additional local code requirements for accessory dwelling units in terms of allowable size, parking spaces, setback, height, etc… There is not a once size fits all rule here for every state, so be sure to know your area. For instance, Sacramento County requires a 10 ft setback for accessory dwellings, one parking space for each bedroom, and a size no more than 1200 sq ft.

Questions: Any stories or insight to share? Do you think it makes a difference whether a property has a second unit or an accessory dwelling unit?

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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling unit, ADU, ADU vs second unit, Appraisal, Appraiser, Duplex, Fannie Mae, highest and best use, house appraisers, HUD, Sacramento, second unit, zoning

Some important things to know about water heaters and FHA

August 7, 2013 By Ryan Lundquist 2 Comments

After reading this post, you will hopefully be more prepared to play the “FHA water heater” category on Jeopardy. This means you could win lots of money. Okay, maybe not, but let’s do some thinking together anyway.

gas or electric water heater - sacramento appraisal blog

Is it gas or electric? First off, how do you know if a water heater is gas or electric? Both water heaters look very similar to the untrained eye, but there are some noticeable differences when you really compare the two. As you can see in the image above, there is a gas line going into the gas water heater, but no such line going into the electric water heater. Additionally, there is a vent on top of the gas water heater, but no vent on the electric. You might notice too the gas water heater has a space for a pilot light, but there is no pilot light on the electric water heater. I know this is elementary, but it’s good to rehearse since not everyone is a water heater Jedi.

FHA water heater requirements - Sacramento Appraisal Blog

What does FHA say about water heaters? It’s important to realize FHA does not create or enforce code. FHA simply defers to local code for water heater requirements. This means if local code mandates particular types of water heater straps, requirements for a pressure release valve or whether a water heater is on or off the ground, that’s what the home owner, real estate agent and appraiser should be paying attention to during an FHA transaction (or any transaction).

In the case of the photo above, the gas water heater (do you see the gas line?) was originally directly on the ground when it should have been raised 18 inches off the ground per Sacramento County code. Gas water heaters are required to be elevated so the pilot light is removed from any gas fumes lurking just above the floor. If the water heater had been electric though, it could have been on the garage floor per county code since electric water heaters do not have a pilot light (which means there is not a gas and flame danger). Lastly, regardless of whether the water heater is gas or electric, earthquake straps are required in California on standard water heaters.

Ultimately since the gas water heater was on the ground during an FHA appraisal inspection, it had to be raised to meet current code. This is always what needs to happen during an FHA loan due to local standards. Keep in mind some conventional lenders have strict guidelines about water heaters, but many do not. It is a case by case basis whether a conventional lender would require the water heater to be raised or strapped.

Action Step: If you are wondering what your city or county says about water heater installation for your specific situation, you ought to give the building department a call. There are honestly so many different water heater scenarios depending on size and location, so it is important to ask these questions to your city or county so you can get the definitive answer. I know a thing or two about water heaters, but I won’t know the answers to all of your questions. Please note also that specific water heater requirements in one area of the country may be different from other states (this is again one reason why you should call your city or county).

FHA Article Library: I hope this was helpful. If you’re looking for more information on FHA property or appraisal standards, you can check out other FHA appraisal articles I’ve written.

Any thoughts, questions or stories to share? Comment below.

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Filed Under: FHA Appraisal Articles, Photos from the Field Tagged With: appraiser in Sacramento, before and after photo of water heater, FHA Minimum Property Requirements, FHA water heater straps, gas or electric water heater, Home Appraiser, House Appraiser, HUD, photo of gas and electric water heater, Sacramento County water heater requirements, water heater requirements FHA

Does a property with a flat roof require a roof inspection for an FHA loan?

April 5, 2013 By Ryan Lundquist Leave a Comment

It depends. A roof really only requires an inspection during an FHA loan if the appraiser or underwriter calls for an inspection. This goes for both flat and pitch roofs. Let’s read a bit more below.

flat roof inspection for an fha loan - by Sacramento Appraisal Blog

Straight from HUD on whether an appraiser will automatically require a roof inspection on a flat roof (Mortgagee Letter 05-48):

FHA-photo-by-Ryan-LundquistFHA no longer mandates automatic inspections for flat or unobservable roofs. In the appraisal report the appraiser will note any evidence of deterioration of roofing materials (missing tiles, shingles, flashing). Deteriorated roofing materials include those that are worn, cupped, or curled. If the roof is not observable, the appraiser will look for and include in the appraisal report any telltale signs of roof problems on the interior, such as damage or water stains to the ceiling area of a room or closet. The appraiser must note in the appraisal report that he/she could not adequately observe the entire roof area (state which area(s) were unobservable). Based on the information reported by the appraiser, the lender’s underwriter will determine whether or not a roofing inspection is required.

Summary & Attics: All things considered, a flat roof on any portion of a house won’t necessarily trigger a roof inspection, but an inspection may be required if there are signs on the interior or exterior that point toward roof failure. Remember, a roof has to have at least two years of remaining economic life for an FHA loan. On a related note, the appraiser is required to do a “head and shoulders” inspection of the attic, but when the roof is flat and there is no attic, this requirement obviously doesn’t apply.

I hope this was helpful to answer some of your questions. You can check out other FHA appraisal articles I’ve written, and definitely comment below if you’d like.

Anything you’d like to add or ask?

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

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Filed Under: FHA Appraisal Articles, Resources Tagged With: FHA article library, FHA inspection, FHA minimum property standards, FHA Real Estate Appraiser, Home Appraiser, House Appraiser, HUD, HUD appraiser guidelines, MPS FHA, roof issues FHA loan, sacramento appraisers

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