On January 18, 2023, HUD issued an announcement regarding revisions made to Handbook 4000.1. According to the announcement, the revisions included “enhancements and revisions to existing guidelines and various technical edits.”
The most significant of these revisions was the elimination of the requirement to include the 1004MC form as an attachment to the appraisal report.
Changes to the Handbook also include several other minor, but nevertheless meaningful, edits and clarifications to FHA appraisal requirements, including:
- If the subject property has no deficiencies of MPR or MPS, the appraiser must clearly state this in the appraisal report.
- If the subject property is located in a PUD, the appraiser must identify the name of the PUD, check the PUD box on the form, and indicate the HOA fee per month or per year.
- Under “Minimum Requirements for Living Unit,” a clarification was added to state: “Every living unit must have at least one area with kitchen facilities, which must include, at a minimum, a sink with potable running water and a stove utility hookup.”
- Under “Accessory Dwelling Unit” the following clarification was made: “The appraiser must measure the Contributory Value of the ADU by applying techniques based on one or more of the recognized three approaches to value: cost approach, income approach, and sales comparison approach.”
- Under “Gross Living Area,” the following sentence was added: “The Appraiser may apply a supplemental measurement standard if it does not conflict with these requirements and the Appraiser discloses the use of the standard.” As such, HUD acknowledges that appraisers are permitted to use ANSI Z765 measurement standard in FHA appraisals, but are not required to do so.
- Under “Attic Observation Requirements,” a clarification was made regarding the appraiser’s obligation to “safely” access the attic. The language requiring a minimum “head and shoulders” access into the attic was deleted.
- Under “Crawl Space Observation Requirements,” significant revisions were made, including removal of a bullet point list of MPR/MPS criteria for the crawl space. Also, language requiring a minimum “head and shoulders” access into the crawl space was deleted.
- Under “Individual Water Supply Systems,” a revision was made regarding the appraiser’s reporting requirements when the property is serviced by dug wells, cisterns, or holding tanks used in conjunction with water purchased and hauled to the site.
- Under “FHA Appraisal Requirements for Market Conditions and Changing Markets,” revisions were made regarding the appraiser’s obligation to research and report market conditions. If the market trends are identified as “increasing” or “declining” the appraiser must provide an absorption rate analysis, at least two comparable sales that closed within the prior 90 days, and a minimum of two active listings or pending sales on the sales comparison grid. (Formerly, this was only required in declining markets.)
The changes outlined in the Handbook may be implemented immediately, but must be implemented for FHA cases assigned on or after April 18, 2023.
Please note that originating FHA lenders may issue “overlay” requirements that are in addition to the requirements of HUD/FHA. As such, individual lenders are permitted to continue to require appraisers to use the 1004MC, even though HUD does not. Appraisers are advised to check with the originating lender regarding the 1004MC. Of course, the elimination of this form does not affect the appraiser’s obligation to perform an appropriate analysis of the subject property’s market, including supply and demand factors that influence value.
A “Redline” copy of the revised Handbook 4000.1, with the revisions clearly indicated in strikethrough and underline, can be accessed on HUD’s website.
Written by Daniel A. Bradley, SRA, CDEI. Dan Bradley is a Certified General Appraiser, an AQB Certified USPAP Instructor, and the Content and Curriculum Manager for McKissock Learning. He specializes in USPAP, expert witness appraisal, appraisal review, and FHA appraisals. Dan holds an SRA designation from the Appraisal Institute and served two terms on Pennsylvania’s appraiser licensing board.