When you buy a home with an FHA mortgage, it must be appraised to insure the property meets minimum FHA standards. A home to be purchased with an FHA mortgage must be code-compliant, it must not be too close to high voltage lines or high pressure gas pipelines, and there are specific requirements for property located near know natural disaster zones.
All of these requirements protect buyers and lenders alike, but there are certain instances where a property would never pass the FHA appraisal, yet borrowers seek mortgage loans for these properties anyway. Consider the borrower who needs a home loan to do rehab or repair work on an existing structure that badly needs it.
And what about the borrower who wants to purchase a fixer-upper home, or a property that was foreclosed upon and sold as an “FHA REO” home? Or the buyer who is having a home custom-built?
FHA loan rules in HUD 4000.1 anticipate these issues and set different requirements for such transactions.
It is understood that a home secured by an FHA rehab loan (the FHA 203(k) mortgage or refinance loan, for example) would not be in the same condition as the home put up for sale by an owner or a real estate agent. FHA appraisal rules account for this, as found starting on page 163 of HUD 4000.1:
“If the Mortgage is to be insured under the 203(k) program, the Mortgagee must confirm that the Property will comply with the following eligibility criteria upon completion of repairs and improvements”.
The same types of requirements exist for homes that are built to suit using an FHA construction loan. Obviously there is no home to appraise when construction begins, so the appraiser must review construction plans and other documents as required in the FHA loan handbook:
“When performing an appraisal for a sales transaction or on New Construction, the Appraiser must also review and analyze the following:
-the complete copy of the executed sales contract for the subject; and
-documents related to New Construction, including plans, specifications, and any exhibits provided that will assist the Appraiser in determining what is to be built, or, if now Under Construction, what will be built when finished;
and report the results of that analysis in the appraisal report.”
As you can see, for both FHA 203(k) rehab loans and new construction home loans, the appraisal process accommodates the unique features of both transactions.
Existing construction-homes that have been built, purchased, and occupied at least once-are subject to the “standard” FHA appraisal process, but there’s no one-size-fits-all solution for the other options (rehab loans, new construction, etc.), hence the additional requirements in HUD 4000.1 for such transactions.