December 22, 2010
In our last post we discussed the cost and process of FHA appraisals. Since the FHA appraisal is such an important part of the FHA mortgage process–the loan amount can’t be established without the appraisal–it’s good to know how and why the process works the way it does.
One of the key aspects of getting a fair, accurate estimate of the reasonable market value of a home is the independence of the appraiser. How does the first time FHA borrower know the FHA-approved appraiser is assigning value to the home for sale that’s actually consistent with market practices rather than helping the lender raise the FHA loan amount by over-valuing the property?
According to FHA requirements, FHA lenders cannot use an appraiser who
is “selected, retained or compensated in any manner by a real estate agent, mortgage broker, or any member of the lenders staff who is compensated on a commission basis tied to the successful completion of the loan.” This FHA rule keeps the appraiser and the lender on separate terms. This rule applies to all appraisers on the FHA roster, and the home MUST be reviewed by someone listed on that roster.
The rule against “appraisal shopping” is another way the FHA loan process is designed to keep the system fair. FHA mortgage rules say it’s illegal to order multiple appraisals for the purpose of getting the highest possible dollar amount in reasonable market value. This rule does not forbid a second appraisal out of hand; another one may be needed or even required if the borrower changes lenders.
These circumstances are strictly regulated and the FHA requires lenders to fully document the process. FHA rules state, “The lender must document why a second appraisal was ordered and retain theexplanation in the case binder along with a copy of both appraisals.”
This prevents anyone in the FHA loan process from gaming the system to
get a more favorable appraisal on the property unless it is actually warranted.