Q&A: Lender Overlays and FHA Requirements

Q&A: Lender Overlays and FHA requirementsI recently received an email from a student asking about the FHA requirements of HUD Handbook 4000.1. Specifically, the student wanted to know if FHA still automatically requires a cost approach on houses that are less than one year old, and also if FHA requires the appraiser to provide an estimate of site value in all FHA appraisals.

The answer to both questions is no, but with reservations.

FHA requirements re: approaches to value

Regarding the approaches to value, the HUD Handbook states, “The Appraiser must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant.”

Translation: If the appraiser determines an approach is necessary for credible assignment results, the appraiser must develop that approach. When appraising new construction or a dwelling that is one year old or less, it is likely that the appraiser will need to develop the cost approach. As in any appraisal, if the appraiser decides not to develop one or more of the approaches, he or she will need to support that decision.

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FHA requirements re: site value

Regarding the site value, the Handbook states, “If the cost approach is applicable, the Appraiser must estimate the site value.” Hence, if the cost approach is not applicable in an FHA appraisal, the appraiser is not required to estimate the site value.

However, originating lenders are permitted to place their own requirements on FHA appraisals, and many of them do. These are sometimes called lender overlays. (In USPAP vernacular, they are referred to as assignment conditions.) As an example, some lenders require that an appraiser must complete the cost approach in all appraisal assignments, even those in which the appraiser believes the cost approach will not produce credible results. As another example, a lender might require the appraiser to develop and report an opinion of site value in all appraisal assignments, even if the cost approach is not developed. In an FHA appraisal, an appraiser might find himself or herself going above and beyond the requirements of HUD Handbook 4000.1 That is the lender’s prerogative, whether we like it or not.

To the extent possible, appraisers are advised to familiarize themselves with the lender’s requirements before agreeing to perform an assignment. Don’t assume, just because the subject dwelling is 80 years old and you believe the cost approach will not produce meaningful results, that you won’t have to do the cost approach.

Written by Dan Bradley. Daniel A. Bradley, SRA, CDEI is the Director of Online Appraisal Curriculum for McKissock Learning. He has been a practicing real property appraiser since 1987, and has been instructing and authoring appraisal courses since 1992. He is a state certified general appraiser in Pennsylvania and is currently on the FHA appraiser roster. From 2004 to 2013, Dan was a member of the Pennsylvania State Board of Certified Real Estate Appraisers, serving for five years as vice-chairman and three years as chairman. He has also has served as a contracted expert witness appraisal reviewer for the Pennsylvania Department of State.

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