Second FHA Appraisal Requirement Modified By HUD

by Peter G. Miller
November 25th, 2009

For much of the past two years HUD has required FHA mortgage borrowers to get two appraisals if they want a mortgage of $417,000 or more.

Two appraisals, of course, are more expensive then one appraisal, thus there has been much opposition to the HUD rule. Some of this opposition has been coming from the very people who are screaming about the the decline in FHA reserves — the very declines that the two-appraisal standard was designed to prevent.

The idea of the two-appraisal standard arose at the start of 2008. As HUD explained, “with FHA in position to insure mortgage amounts greatly in excess of what has been its experience as a mortgage insurer, we believe it prudent to set forth additional underwriting and collateral assessment practices for “high-balance” loans.

“Specifically, for mortgage amounts that will exceed the January 1, 2008 conforming limit of $417,000, FHA is establishing a second appraisal requirement for loans on properties in declining areas, and limiting the loan-to-value for cash-out refinances.”

New Rules

Why was the FHA going to a two-appraisal standard? “To mitigate risk to the FHA insurance fund as well as FHA borrowers,” HUD explained.

Now ask yourself a question: Given the decline of the FHA reserve fund, why should the two-appraisal standard be changed? Are market values suddenly skyrocketing?

This time around HUD has not explained why it’s changed the appraisal rule. Since it’s not soaring home prices, why would HUD want a lesser benchmark?

A few reasons stand out.

First, seller-financed downpayment assistance programs (DPAs) are now gone. These were high-risk programs which essentially allowed buyers to purchase with no money down.

Second, credit scores are on the rise, going from 661 last year to 691 in October. That’s a 5 percent increase, but it also means lenders are becoming more picky about borrowers.

Third, HUD has more experience with high-balance loans than it did at the start of 2008.

The New Appraisal Rules

In basic terms, the new appraisal standards, look like this:

___ The previous policy requiring a second appraisal to be performed for loans that exceed $417,000 secured by properties located in declining markets has been rescinded.

___ The FHA will no longer require a second appraisal to be performed when the mortgage amount for cash-out refinance exceeds $417,000 and is secured by a property located in a declining market.

___ The anti-flipping rule remains in place: A second appraisal is required when a property is resold between 91 and 180 days following acquisition by the seller, if the resale price is 100 percent (or more) higher than the price paid by the seller when the property was acquired. The lender must obtain a second appraisal from another appraiser and the cost of the second appraisal may not be charged to the homebuyer. (The FHA in most cases will not finance a property that has been resold in less than 90 days.)

If you’re wondering why you can’t get a lender to finance a purchase with an FHA loan if the property was re-sold within 180 days, just think about the special HUD requirement in such circumstances: The cost of the second appraisal may not be charged to the homebuyer.

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