FHA Appraisal Questions

• The Federal Housing Administration (FHA) encourages home ownership in a number of ways, not the least of which is by insuring mortgage loans that protect lenders against default by their borrowers. The insurance reduces a lender's risk, thus enabling it to make more loans. In this sense, the FHA has an investment in the properties it insures. It protects its investment by requiring special appraisals to determine the homes' market values and to make sure the homes it insures meet minimum property requirements for safety and habitability. It's not unusual for buyers and sellers to have questions about FHA appraisals.

Who is Responsible for Appraisal Quality?

• The FHA notes that responsibility for the quality of an FHA appraisal rests equally with the lender and the appraiser. When an appraisal report is sent to the FHA as part of the mortgage loan process, the FHA expects it to be thorough and truthful. It must also uphold the standards of integrity to which the FHA holds its lenders and appraisers. The FHA can take action against a lender, an appraiser or both if it finds the appraisal was ordered, carried out or reported improperly.

Who Picks the Appraiser?

• The buyer may not select his own appraiser. The appraisal has to be conducted by an appraiser listed on the FHA Appraisal Roster of eligible appraisers. Your lender may choose an appraiser from that roster as long as it doesn't discriminate and as long as no one associated with the lender receives a kickback from the choice of the appraiser. However, "loan production staff" and staff who report to an officer of the lending institution who is involved in the loan process may not engage in substantive discussions with an FHA appraiser, if the discussion is related to the appraisal or if it could affect the appraiser's findings.

May the Lender Waive Repairs?

• The lender may only waive repairs if they're cosmetic or unnecessary items that won't prevent the property from meeting the FHA's minimum property requirements. In most cases, minimum property requirement items are conditions for closing, so they must be done before closing. There is an exception, however: a repair that HUD determines to be qualified for escrow. In this case, the seller would put the money to pay for the repair into an escrow account. The buyer would use the money after closing to make the repair.

Are Distressed Sales Comparable?

• The FHA discourages use of distressed sales, like foreclosures and short sales, as comparables because they're carried out under special circumstances, against the will of the sellers. These conditions, according to the FHA, prevent distressed-sale prices from accurately reflecting local market value. However, in areas where there have been enough foreclosures and short sales that they make up a substantial part of the market, distressed sales can be used as comparables because, in these cases, they do reflect market conditions.