June 27, 2017

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FHA Appraisal Rules: Basements

A reader asked us an appraisal question in our comments section recently about unfinished basements. “We were conditionally approved for FHA. There were two items in to be completed in the FHA appraisal before closing. Finish flooring in bedroom (completed).”

“The room was being completely redone And, 2. Finish bathroom in basement. This is an unfinished basement with framing and partial drywall. The rough bathroom has the toilet and sink installed. My question is: Does a basement need to be finished for FHA approval? From what I have read, the basement is not calculated as living space.”

While it is true that FHA loan rules in HUD 4000.1 mention not counting the basement as part of the Gross Living Area, FHA appraisal rules are not the only ones which may apply. If the FHA appraiser has listed a condition such as an unfinished bathroom as being in need of corrections, those corrections are a condition of loan approval.

That is true regardless of the source of the rules that dictate the corrections whether those rules are FHA loan standards, State or local building code, etc. Just because the FHA does not specifically mention an issue in the appraisal standards does not mean other regulations won’t apply.

Having said that, does HUD 4000.1 have rules in this area? One part of the FHA requirements found in HUD 4000.1 includes a section on “converted spaces”. It states:

“The Appraiser must 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… and was built in keeping with the design, appeal, and quality of construction of the main dwelling.”

Furthermore,

“The Appraiser must analyze and report differences in functional utility when selecting comparable properties of similar total GLA that do not include converted living space. If the Appraiser chooses to include converted living spaces as GLA, the Appraiser must include an explanation detailing the composition of the GLA reported for the comparable sales, functional utility of the subject and comparable properties, and market reaction.”

So we can see that while these rules do not specifically address the reader question, there are a few grey areas which may apply. Building code in the reader’s local area may require bathrooms to be finished, or there may be other issues at work that were not mentioned in the reader question.

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