FHA loan rules specifically prohibit ordering a second appraisal just because one party or the other is hoping for a different valuation of the home. HUD 4000.1 states the lender is, “prohibited from ordering an additional appraisal to achieve an increase in value for the Property and/or the elimination or reduction of deficiencies and/or repairs required.” (FHA loan rules also add that the lender is permitted to order a second appraisal, “for Mortgages that are in accordance with requirements on Property Flipping”.)
But when is a second appraisal permitted?
HUD 4000.1 says that the original mortgagee or lender is allowed to order a second appraisal, “if the Direct Endorsement (DE) underwriter (underwriter) determines the first appraisal is materially deficient and the Appraiser is unable or uncooperative in resolving the deficiency.”
The lender would be required to fully document the deficiency and status of the appraisal, and it’s the lender’s responsibility to pay for the new appraisal, not the borrower.
What’s considered a deficiency? According to FHA loan rules:
“Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability. Material deficiencies include, but are not limited to:
–failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house;
–reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal; and
–fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client.”
A second appraisal may also be ordered by a second mortgagee. In such cases, the following applies from HUD 4000.1 Section II Part A:
A second appraisal may only be ordered by the second Mortgagee under the following limited circumstances:
–the first appraisal contains material deficiencies as determined by the underwriter for the second Mortgagee;
–the Appraiser performing the first appraisal is prohibited from performing appraisals for the second Mortgagee; or
–the first Mortgagee fails to provide a copy of the appraisal to the second Mortgagee in a timely manner, and the failure would cause a delay in closing and harm to the Borrower, including loss of interest rate lock, violation of purchase contract deadline, occurrence of foreclosure proceedings and imposition of late fees.”
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