Borrowers who are interested in having a home built for them from the ground up using an FHA construction loan such as an FHA One-Time Close mortgage or any other type of FHA-guaranteed mortgage loan may wonder what the rules are for appraisals.
After all, existing construction appraisal processes are for a home that is ready to sell (although the process may vary if the borrower is applying for certain types of rehab loans).
While the appraisal requirements may be generally the same-the home must be safe, habitable, and have an economic life for the entire duration of the mortgage-there are procedural issues that affect new construction properties.
With that in mind, appraisals on new construction run a bit differently in some procedural ways than existing construction mortgages; with the construction loan the appraiser must perform their work within a specified set of parameters that may be affected by the progress of the construction.
From HUD 4000.1 we learn that some parameters of the FHA appraisal apply to both existing and new construction loans:
“The effective date of the appraisal cannot be before the FHA case number assignment date unless the Mortgagee certifies that the appraisal was ordered for conventional lending or government-guaranteed loan purposes and was performed pursuant to FHA guidelines.
New construction appraisal rules in HUD 4000.1 include guidelines for the appraiser to review the project’s documentation:
“When performing an appraisal for a sales transaction or on New Construction (emphasis ours), the Appraiser must also review and analyze:
- 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.”
But the construction phase for any FHA One-Time Close mortgage or other FHA construction loan options doesn’t always run to a standardized schedule; the appraiser may need to do her work before or after the construction reaches the 90% completion point. HUD 4000.1 addresses requirements depending on when the appraiser does the work:
“When New Construction is less than 90% complete at the time of the appraisal, the Appraiser must document the floor plan, plot plan, and exhibits necessary to determine the size and level of finish. When New Construction is 90% or more complete, the Appraiser must document a list of components to be installed or completed after the date of appraisal.”
What about contractor work to be performed on existing construction homes to be purchased with an FHA mortgage? HUD 4000.1 includes some guidance in this area, too:
“For labor on Existing Construction, the Mortgagee must also obtain an appraisal indicating the repairs or improvements to be performed. (Any work completed or materials provided before the appraisal are not eligible.)”