June 4, 2020

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FHA Loan Appraisal Issues: Environmental Concerns

FHA Loan Appraisal Issues: Environmental Concerns

The FHA appraisal requires attention to a variety of areas in and around the home, but one aspect of the appraisal has to do with assessing safety hazards and environmental issues that could interfere with the borrower’s ability to use the home.

In the case of these FHA appraisal rules, the term “environmental” refers specifically to the areas in and around the home.

HUD 4000.1, the FHA loan handbook, begins addressing these concerns by instructing the lender:

“The Appraiser must report known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the Property’s ability to serve as collateral, and the structural soundness of the improvements”. Such hazards can include lead-based paint, mold, chemicals, and other hazards.

One recent addition to the HUD list of hazards is contamination of the home by the use or manufacture of methamphetamine on the property. A former “meth home” would require the appraiser to “render the appraisal subject to the Property being certified safe for habitation”.

FHA loan rules add that in cases where the date of the appraisal “is prior to certification that the Property (site and dwelling) is safe for habitation, the Appraiser will complete the appraisal subject to certification that the Property is safe for habitation”.

The appraisal results must include paperwork from a certified hygienist stating that the property is safe to live in.

HUD 4000.1 says the appraiser must note the age of the property being reviewed; homes built on or before 1978 are assumed to have lead-based paint; cracking or peeling paint in such properties is far more than a cosmetic issue in the eyes of HUD 4000.1.

The appraiser is required to note the presence or evidence of termites or other wood-destroying pests. In such cases, the appraisal would likely require pest abatement as a condition of loan approval.

None of these issues is necessarily a deal-killer on their own; much depends on the borrower’s willingness to buy knowing about these issues and the fact that they must be corrected as a condition of loan approval. But in some cases does the cost of those corrections make it harder to justify the sale?

The answers come on a case-by-case basis, but it’s important for FHA borrowers to make the most informed choices they can.

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