The Department of Housing and Urban Development has outlined new appraisal requirements for Federal Housing Administration financing on HUD real estate owned.
FHA mortgagees sometimes are able to use the appraisal originally ordered by HUD on REO properties when a the home buyer is utilizing FHA financing.
But HUD laid out a number of situations where a new appraisal will be required on purchases of HUD REOs that are financed with an FHA mortgage.
The new requirements, outlined in Mortgagee Letter 2013-44, are effective on Feb. 6, 2014.
One such scenario requiring a new appraisal is when a direct endorsement underwriter determines that there is a material deficiency with the current HUD REO appraisal.
HUD said that a new HUD REO appraisal is required if an as-repaired appraisal is being used when the borrower is applying for a 203(k) loan.
Another scenario requiring a new appraisal is when the REO sales contract was not ratified within 120 days of the HUD-REO appraisal’s effective date.
A new appraisal will also be required when the appraisal ordered by HUD is no longer valid.
In all four scenarios, the value will be based on the new appraisal.
HUD said that when the contract sales prices is greater than the value of the appraisal ordered by HUD and that report doesn’t have an as-is value, then the FHA loans will be based on the lower of the sales price, the new appraisal value or the initial list price.
When a new appraisal is ordered, the original HUD appraisal can’t be used to underwrite the loan, the lender or borrower is responsible for the fee and the mortgagee must provide written justification for ordering the new appraisal. Mortgagees are required to retain copies of all appraisals in the loan file.
To ensure that HUD REOs are sold at or near market value, FHA defines market value as a sale where the buyer and seller are typically motivated, both parties are well-informed and -advised and acting in their own best interests, a reasonable time is allowed for market exposure, payment is based on cash U.S. dollars, and the price represents normal consideration and is not affected by special or creative financing or sales concessions provided by anyone involved in the sale.
Appraisers need to note the conditions of sale and the motivations of the sellers and purchasers when considering comparable sales. REO and pre-foreclosure short sales must be analyzed by the appraiser to determine their effect on the market and subject property.
But REOs and pre-foreclosures are not always appropriate comparable sales, and appraisers need to provide an explanation when they are used.
When a property is transferred to a mortgagee or lender that owns the mortgage through a foreclosure sale, it can’t be used as comparable sales.
