FHA Appraiser Mandates Utility Requirement

by Lore DeAstra, MBA, SRA, CDEI, Author of the FHA Checklist and eBook

In an effort to protect ourselves, allow me to relay a recent conversation between an appraiser and agent/builder, that came to me in the form of a question from a reader. The answer is also below. The question said:

“An appraiser friend commented that he completed an FHA appraisal the other day and that the real estate agent/builder was surprised when my friend asked the agent/builder to show that the property had working utilities. The agent/builder told him that he had done about five transactions before, with another appraiser, and that the previous appraiser had never asked him to prove that the utilities were operational.  The water and electric were on, he said, but not the gas. The agent/builder said that they do not turn the gas on in the summer but that he would make an exception for the appraiser. The fact that the pervious appraiser had not asked for this information seemed odd to my friend, since it was his understanding that confirming working utilities (water, gas and electric) is a requirement by the FHA.”

Q: Was the agent/builder and previous appraiser correct in inspecting a home for FHA without utilities?

A: Unless the equipment would be damaged if operated, ALL utilities must be on during an appraisal inspection. For instance, if the home had gas heat and the summer temperatures were above 90 degrees, it may damage the air conditioning unit. Solution: The appraiser would then mention the circumstances and offer to re-inspect, when appropriate, later.

Q: What if the utilities (water, sewer, electric, gas) are not on?

A: Make another appointment when the utilities are operational.

Not convinced? Let us review a direct quote from FHA, highlighted in yellow and pink for your convenience.
 

“Chapter 1, Appraisal & Property Requirements, Page 1-19

Utilities Not On - Please see: Mortgagee Letter 2005-48, Revised Appendix D. For the URAR -pages D-23 and D-24; for Manufactured Homes - D-55 and D-56; Condos - D-90; 2-4 Family - D-116 and D-117. When utilities (water, gas, electric) are NOT on at the time of appraisal the appraiser is to condition for further inspection to determine if the utilities are in proper working order.

NOTE: The appraiser will also annotate in the appraisal that additional repair requirements may apply once all the utilities are on and fully functional.

Checking Mechanical Systems - Please see: Mortgagee Letter 2005-48 An appraiser must examine mechanical, plumbing and electrical systems to ensure they are in proper working order. The appraiser should turn on the systems and observe their performance. The appraiser may call for a certification of a system when he/she cannot determine if it is working properly. An appraiser should not arbitrarily call for such certifications and should understand that they are still responsible for checking on the adequacy of these systems at the time of appraisal. For 2-4 units, note the type of heating and cooling for each unit, if different. *Do not operate the systems if doing so may damage equipment, or when outside temperatures will not allow the system to operate. Note in the appraisal report why the system(s) could not be tested. [1]

December 19, 2005

MORTGAGEE LETTER 2005- ML-48  

TO:                  ALL APPROVED MORTGAGEES
                       ALL APPROVED APPRAISERS

 SUBJECT: FHA Repair and Inspection Requirements for existing properties and revisions to FHA Appraisal Protocol  

In September 2005, the Federal Housing Administration (FHA) issued Mortgagee Letter 2005-34, which announced the adoption of four of Fannie Mae’s revised appraisal reporting forms as well as the release of Revised Appendix D of Handbook 4150.2, CHG-1.  This Mortgagee Letter provides additional guidance regarding FHA’s repair and inspection requirements for existing properties and the use of the Fannie Mae appraisal reporting forms.  All appraisal guidance for new construction that serves as security for FHA-insured mortgages remains unchanged beyond the clarification in the Revised Appendix D that the appraiser may appraise a home that is under construction and that is 90% or more complete without benefit of plans and specifications.

In a continuing effort to reform and standardize its appraisal requirements, FHA has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects or normal wear and tear.  FHA Roster Appraisers are reminded to report all readily observable property deficiencies, as well as any adverse conditions discovered performing the research involved in completing the appraisal, within the appraisal reporting form.  Lenders should use professional judgment and rely upon prudent underwriting practices in determining when a property condition poses a threat to the safety of an occupant and/or jeopardizes the soundness and structural integrity of the property, such that additional inspections and/or repairs are necessary. 

Revisions to the appraisal reporting guidance contained in Chapters 2 and 3 of Handbook 4150.2, CHG-1 are limited to those described in this Mortgagee Letter and Mortgagee Letter 2005-34 and Revised Appendix D. The specific areas of guidance that are rescinded by this Mortgagee Letter are delineated below.  FHA intends to retire and replace Handbook 4150.2, CHG-1 in the near future. 

Repair Requirements
As stated in Revised Appendix D, FHA now permits an “as-is” appraisal for existing properties that serve as security for FHA-insured mortgages when minor property deficiencies, which generally result from deferred maintenance and  normal wear and tear, do not affect the safety of the occupants or the security and soundness of the property.  FHA no longer requires repairs for these types of minor cosmetic deficiencies to bring a property into compliance with FHA Minimum Property Requirements.  Specifically, the guidance provided in Handbook 4150.2, CHG-1, Chapter 3, Paragraph 3-6, A-7 referencing all-weather road surfaces; Paragraph 3-6, A-8 referencing poor workmanship; Paragraph 3-6, A-11 referencing debris and trash in crawl space; Paragraph 3-6, A-16 referencing steps without a handrail; Paragraph 3-6, C referencing bare floors, badly soiled carpeting and cracked plaster and sheetrock is no longer applicable.   Additionally, the guidance provided in Handbook 4905.1, REV-1, Chapter 2, Paragraph 2-7, A-2 referencing all weather road surfaces; Paragraph 2-8 referencing poor workmanship and Paragraph 2-14, C referencing crawl spaces with debris and trash is no longer applicable.  Any reference to the Valuation Condition form (form HUD-92564-VC) and protocol for its completion contained in Handbook 4150.2 is no longer applicable as well.  Examples of minor property conditions that no longer require automatic repair for existing properties include, but are not limited to:

·         Missing handrails
·         Cracked or damaged exit doors that are otherwise operable
·         Cracked window glass
·         Defective paint surfaces in homes constructed post 1978
·         Minor plumbing leaks (such as leaky faucets)
·         Defective floor finish or covering (worn through the finish, badly soiled carpeting)
·         Evidence of previous (non-active) Wood Destroying Insect/Organism damage where there is 
          no evidence of unrepaired structural damage
·         Rotten or worn out counter tops
·         Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post-
          1978
·         Poor workmanship
·         Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
·         Crawl space with debris and trash
·         Lack of an all weather driveway surface

Examples of property conditions that may represent a risk to the health and safety of the occupants or the soundness of the property for which FHA will continue to require automatic repair for existing properties include, but are not limited to:

·         Inadequate access/egress from bedrooms to exterior of home
·         Leaking or worn out roofs (if 3 or more layers of shingles on leaking or worn out roof, all
          existing shingles must be removed before re-roofing)
·         Evidence of structural problems (such as foundation damage caused by excessive settlement)
·         Defective paint surfaces in homes constructed pre-1978
·         Defective exterior paint surfaces in home constructed post-1978 where the finish is otherwise
          unprotected.

Lenders must review the appraisal to determine whether the appraiser has reported any property conditions that will affect the health and safety of the occupants or the security and the soundness of the property and must require immediate repair where the property condition poses a threat to these criteria. 

Inspection Requirements
FHA no longer mandates automatic inspections for the following items and/or conditions in existing properties: 
·         Wood Destroying Insects/Organisms:  inspection required only if evidence of active
           infestation, mandated by the state or local jurisdiction, if customary to area, or at lender’s
           discretion
·         Well (individual water system):  test or inspection required if mandated by state or local
            jurisdiction; if there is knowledge that well water may be contaminated; when the water
            supply relies upon a water purification system due to presence of contaminants; or when
            there is evidence of:

-Corrosion of pipes (plumbing)
-Areas of intensive agriculture within ¼ mile
-Coal mining or gas drilling operations within ¼ mile
-Dump, junkyard, landfill, factory, gas station, or dry cleaning operation within ¼ mile
-Unusually objectionable taste, smell or appearance of well water
-(superceding the guidance in Mortgagee Letter 95-34 that requires well water testing in -the absence of local or state regulations)

·         Septic:  test or inspection required only if evidence of system failure, if mandated by state or
           local jurisdiction, if customary to the area, or at lender’s discretion
·         Flat and/or unobservable roof

Consequently, the guidance provided in Handbook 4150.2, Chapter 3, Paragraph 3-6, A-6 referencing mandatory termite inspections for any structure that is ground level and for any structure where wood touches the ground; Paragraph 3-6, A-5 referencing mandatory well and septic tests; and Paragraph 3-6, A-12 referencing mandatory inspections for a flat roof is no longer applicable.  Additionally, the guidance provided in Handbook 4905.1, REV-1, Chapter 2, Paragraph 2-5, B-1 referencing mandatory well water tests is no longer applicable.  In cases where well tests are necessary, as described above, FHA’s existing testing standards outlined in Chapter 3, Paragraph 3-6, A-5a. of Handbook 4150.2 remain in effect and supercede Mortgagee Letter 95-34.  If the appraiser reports a potential property deficiency that may pose a threat to the safety of the occupants or the security and soundness of the property, the lender will require an inspection of the condition to determine whether repairs are necessary to mitigate or resolve the problem.  Examples of conditions that will continue to require automatic inspections include, but are not limited to: 

·         Standing water against the foundation and/or excessively damp basements 
·         Hazardous materials on the site or within the improvements
·         Faulty or defective mechanical systems (electrical, plumbing, or heating)
·         Evidence of possible structural failure (e.g., settlement or bulging foundation wall)

Additional Changes to Appendix D, Valuation Protocol
As a result of these changes in FHA’s repair and inspection requirements for existing properties, Revised Appendix D of Handbook 4150.2, CHG-1 has been updated.  The following pages in Revised Appendix D have been updated to reflect these changes: 2, 4, 19, 23, 27, 50, 55, 60, 85, 92, 112, 116 and 120.   Revised Appendix D is attached to this Mortgagee Letter and will be available online at: http://www.hudclips.org/cgi/index.cgi

 Conditional Commitment Form
Mortgagee Letter 2005-34 instructed the mortgagee to provide a copy of the completed form HUD-92800.5B (Conditional Commitment Direct Endorsement Statement of Appraised Value) to the mortgagor at least five business days prior to loan closing.  The five-business day delivery date prior to loan closing of the Conditional Commitment form is hereby rescinded and lenders are instructed to ensure that the mortgagor receives either a completed copy of HUD 92800.5B, or a copy of the completed appraisal report, at or before loan closing. 

This Mortgagee Letter is effective for all appraisals performed on or after January 1, 2006.  

If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605.

                                                Sincerely,

                                                            Brian D. Montgomery
                                                            Assistant Secretary for Housing-                                                            Federal Housing Commissioner

In conclusion, an appraiser is like a well-educated detective for FHA through a lender. Remember, the FHA regulations benefit everyone involved in the transaction from the consumer-lender-appraiser-FHA-tax payer. Let your sleuth skills shine!

About the Author
Lore DeAstra, MBA, SRA, CDEI, author of FHA – The Future of Financing (FHA Guide, Checklist and eBook). See below for details on the package.