By Steve King – Partner, DS Murphy Valuations – Certified in GA, FL and TX
DS Murphy is one of the largest appraisal companies in the country, and as such we do A LOT of FHA appraisals. We get numerous questions from agents about FHA appraisal standards, but the frequency of questions is increasing. It seems timely to do a review of FHA.
Let’s start with a quick review of what FHA is in terms of financing history, why it exists, and then talk about appraisal standards.
A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required.
Congress created the FHA in 1934 during the Great Depression. At that time, the housing industry was in trouble: Default and foreclosure rates were skyrocketing, 50% down payments were commonly required, and the mortgage terms were impossible for ordinary wage earners to meet. As a result, the U.S. was primarily a nation of renters, and only one in 10 households owned their homes.
The FHA mortgage program was designed to allow for expanded consumer access to residential mortgages. Since down payment requirements are lower (3.5%), credit scores can be lower and debt to income ratios are allowed to be greater (up to 57% gross), FHA is concerned that borrowers may not be in a financial position to make requirements and in turn do not want to be concerned with repairs or improvements to the subject property as it exists. As a result, the property requirements are more stringent than for conventional loans. The current FHA loan limit in our region is $420,680. Even with rapidly rising home values, FHA loans are available to a wide pool of potential home buyers.
Every FHA appraisal includes one of the following statements:
- The subject complies with HUD MPRs/4000.1
- The subject does not comply with HUD MPRs/4000.1
What is MPRs/4000.1 and what does this mean?
MPR stands for Minimum Property Requirements (you may also see MPS, or Minimum Property Standards)
The following are general requirements that the property must have:
- a continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate quality for all household uses
- sanitary facilities and a safe method of sewage disposal. Every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower
- adequate space for healthful and comfortable living conditions
- heating adequate for healthful and comfortable living conditions
- domestic hot water
- electricity adequate for lighting, cooking and for mechanical equipment used in the living unit
This list is just a starting point for FHA appraisal standards. To dive deeper, why don’t we start by doing a virtual walk through of a typical “subject property”?
Let’s start on the outside.
When an Appraiser arrives at a property the first thing they will do is look around. When looking around they will be answering a few mental questions.
- Does the property fit into its location? Exclusively residential? Same general design?
- Are there any external influences that need to be taken into consideration?
- What about the site? Does the lot provide for adequate drainage? Are there any other considerations regarding the site?
Some examples of external influences or externalities (off-site conditions) that might affect a property’s value include:
- Heavy Traffic – The Appraiser must analyze and report if close proximity to heavily traveled roadways or railways has an effect on the marketability and value of a site because of excess noise and safety issues.
- Airport Noise and Hazards – The Appraiser must identify if the Property is affected by noise and hazards of low flying aircraft because it is near an airport.
- Nearby commercial or industrial development – the appraiser must analyze and report on any impact to value.
While walking the site the Appraiser will be observing the following:
Grading and Drainage
- The Appraiser must check for readily observable evidence of grading and drainage problems. Proper drainage control measures may include gutters and downspouts or appropriate grading or landscaping to divert the flow of water away from the foundation.
- The Appraiser must make the appraisal subject to repair if the grading does not provide positive drainage away from the improvements. The Appraiser must note any readily observable evidence of standing water adjacent to the foundation that indicates improper drainage.
Residential Underground Storage Tanks
- The Appraiser must note any readily observable surface evidence of residential underground storage tanks, such as fill pipes, pumps, ventilation caps, etc. If there is readily observable evidence of leakage or onsite contamination, the Appraiser must make a requirement for further inspection. Most people think of older homes, and underground tanks for fuel oil with this requirement, but we see a lot of homes today (particularly in some suburban Florida areas) that have underground propane tanks for gas appliances and heat.
Other Exterior considerations
• Defective Paint – The appraiser must report all defective paint surfaces on the exterior and require repair of any defective paint that exposes the subsurface to the elements.
- Handrails and railings – These must be present on elevated exterior porches, patios, decks, and balconies where the distance from the finished floor to the ground surface is greater than 18 inches.
**The Appraiser must report when the Property has security bars on bedroom windows or doors
Swimming Pools
The Appraiser must report readily observable defects in a noncovered pool that would render the pool inoperable or unusable. If the pool water contains algae and is aesthetically unappealing, but the Appraiser has no evidence that the pool is otherwise contaminated, no cleaning is required. Swimming pools must be operational to provide full contributory value.
If the swimming pool has been winterized, or the Appraiser cannot determine if the pool is in working order, the Appraiser must complete the appraisal with the extraordinary assumption that the pool and its equipment can be restored to full operating condition at normal costs
Roof Covering
The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the roof covering does not prevent entrance of moisture or provide reasonable future utility, durability and economy of maintenance and does not have a remaining physical life of at least two years.
The Appraiser must identify the roofing material type and the condition observed in the “Improvements” section of the report. The Appraiser must report if the roof has less than two years of remaining life and make the appraisal subject to inspection by a professional roofer. When the Appraiser is unable to view the roof, the Appraiser must explain why the roof is unobservable and report the results of the assessment of the underside of the roof, the attic, and the ceilings.
Crawl Space Observation Requirements
- The floor joists must be sufficiently above ground level to provide access for maintaining and repairing ductwork and plumbing.
- If the crawl space contains any system components, the minimum required vertical clearance is 18 inches between grade and the bottom of the floor joists.
- The crawl space must be properly vented unless the area is mechanically conditioned.
- The crawl space must be free of trash, debris, and vermin.
- The crawl space must not be excessively damp and must not have any water pooling. If moisture problems are evident, a vapor barrier and/or prevention of water infiltration must be required
Wood Destroying Insects/Organisms/Termites
The Appraiser must observe the foundation and perimeter of the buildings for evidence of wood destroying pests. The Appraiser’s observation is not required to be at the same level as a qualified pest control specialist.
If there is evidence or notification of infestation, including a prior treatment, the Appraiser must mark the evidence of infestation box in the “Improvements” section of the appraisal and make the appraisal subject to inspection by a qualified pest control specialist
Let’s move inside now.
When the Appraiser moves through the interior, he or she will be considering how to categorize the spaces within. What is GLA and what is a bedroom for appraisal purposes?
Gross Living Area (GLA) refers to the total area of finished, above-grade residential space calculated by measuring the outside perimeter of the structure. It includes only finished, habitable, above-grade living space.
- identify noncontiguous living area and analyze its effect on functional utility
- ensure that finished basements and unfinished attic areas are not included in the total GLA
- use the same measurement techniques for the subject and comparable sales and report the building dimensions in a consistent manner.
Bedrooms
The Appraiser must not identify a room as a bedroom that cannot accommodate ingress or egress in the event of an emergency, regardless of location above or below grade. A bedroom must also meet minimum size requirements and in most cases have a closet and convenient access to a full bath.
The Appraiser must also consider the following systems within the subject. This examination may require the Appraiser to return outside for further survey.
Heating and Cooling Systems
The Appraiser must examine the heating system to determine if it is adequate for healthful and comfortable living conditions, regardless of design, fuel, or heat source.
The property must have a permanently installed heating system that has the ability to…
- automatically heat the living areas of the house to a minimum of 50 degrees Fahrenheit in all GLAs, as well as in non-GLAs containing building or system components subject to failure or damage due to freezing
- provide healthful and comfortable heat or is not safe to operate
- rely upon a fuel source that is readily obtainable within the subject’s geographic area
- have market acceptance within the subject’s marketplace
- operate without human intervention for extended periods of time.
- central air conditioning is not required but, if installed, must be operational.
Electrical System
The electrical system must be adequate to support the typical functions performed in the dwelling without disruption, including appliances adequate for the type and size of the dwelling.
The Appraiser must examine the electrical system to ensure that there is no visible frayed wiring or exposed wires in the dwelling, including garage and basement areas, and report if the amperage and panel size appears inadequate for the property. The Appraiser must operate a sample of switches, lighting fixtures, and receptacles inside the house and garage, and on the exterior walls, and report any deficiencies. The Appraiser is not required to insert any tool, probe or testing device inside the electrical panel or to dismantle any electrical device or control.
Plumbing System
The plumbing system must function to supply water pressure, flow, and waste removal.
The Appraiser must flush the toilets and operate a sample of faucets to observe water pressure and flow, to determine that the plumbing system is intact, that it does not emit foul odors, that faucets function appropriately, that both cold and hot water run, and that this are no readily observable evidence of leaks or structural damage under fixtures. The Appraiser must examine the water heater to ensure that it has a temperature and pressure-relief (TPR) valve with piping to safely divert escaping steam or hot water.
If the property has a septic system, the Appraiser must visually observe it for any signs of failure or surface evidence of malfunction. If there are readily observable deficiencies, the Appraiser must require repair or further inspection. The Appraiser must also report on the availability of public sewer to the site.
For FHA appraisals, the Appraiser must observe the interiors of attic spaces.
The Appraiser is not required to disturb insulation, move personal items, furniture, equipment, or debris that obstructs access or visibility. If unable to view the area safely in their entirety, the Appraiser must contact the Mortgagee and reschedule a time when a complete visual observation can be performed or complete the appraisal subject to inspection by a qualified third party. In cases where access through a scuttle is limited and the Appraiser cannot fully enter the attic, the insertion of at least the head and shoulders of the Appraiser will suffice.
If there is evidence of a deficient condition (such as a water-stained ceiling, insufficient ventilation, or smell of mold), the Appraiser must report this condition, and render the appraisal subject to inspection and repairs if necessary.
Nonstandard House Styles
Nonstandard House Style refers to unique properties in the market area, including log houses, earth sheltered housing, dome houses, houses with lower-than-normal ceiling heights, and other houses that in the Appraiser’s professional opinion, are unique.
The Appraiser must calculate GLA based on the overall length, including living areas and other projections that are at least seven feet in height. As you can see in the picture below, if the overall ceiling height is clearly below the 7’, this is a nonstandard house and should be noted as such. The appraiser must report this deficiency and note the property does not meet MPRs/4000.1 requirements
After walking through the dwelling, the Appraiser might realize that there are additional spaces to consider. Some of these might be…
Additions and Converted Space
The Appraiser is to treat room additions and garage conversions as part of the GLA of the dwelling, provided that the addition or conversion space:
- is accessible from the interior of the main dwelling in a functional manner
- has a permanent and sufficient heat source
- was built in keeping with the design, appeal, and quality of construction of the main dwelling.
Room additions and garage conversions that do not meet the criteria listed above are to be addressed as a separate line item in the Sales Comparison Approach Grid, not in the GLA. The Appraiser must address the impact of inferior quality garage conversions and room additions on marketability as well as Contributory Value, if any.
Accessory Dwelling Units (ADUs)
This refers to a habitable living unit added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate. It is a separate additional living unit, including kitchen, sleeping, and bathroom facilities.
As part of the highest and best use analysis, the Appraiser must make the determination to classify the Property as a Single-Family dwelling with an ADU, or a two-family dwelling.
An ADU is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.
Let’s discuss other considerations the Appraiser must give after the walk-through.
As-Is Condition and Cosmetic Repairs
The Appraiser may complete an as-is appraisal for existing properties when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the health and safety of the occupants or the security and soundness of the property. Cosmetic or minor repairs are not required, but the Appraiser must report and consider them in the overall condition when rating and valuing the property.
If an element is functioning well but has not reached the end of its useful life, the Appraiser should not recommend replacement because of age.
Defective Conditions Requiring Repair
The nature and degree of any noted deficiency will determine whether the Appraiser must address the deficiency. This report can be found in the narrative comments area of the report under “condition of the property” or “physical deficiencies” affecting livability or structural soundness.
It is important to keep in mind that an Appraiser is not a home inspector. The FHA-published handbook states “Appraiser refers to an FHA Roster Appraiser who observes, analyzes, and reports the physical and economic characteristics of a property and provides an opinion of value to FHA. An appraiser’s observation is limited to readily observable conditions and is not as comprehensive an inspection as one performed by a licensed home inspector.” When an Appraiser examines a subject property for the purposes of an FHA appraisal, he or she must understand the expected components and be trained on the minimum property requirements. When real estate agents take a listing in an area with the potential for FHA financing, they have an obligation to their client, and their profession to understand the requirements for such financing. We hope you’ve found this information helpful as you navigate the world of FHA.