There have been recent changes to home appraisals that don’t directly affect FHA Loans and changes to the general scrutiny of underwriting guidelines that directly affect FHA loans. There has been a big recent change in how appraisals are ordered for conventional loans called HVCC. They are now ordered directly through the bank and assigned by someone other than the bank. For years prior all appraisals were ordered by the loan officer handling the loan. With this new system of appraisals, the loan officer has no contact with the appraiser. Through early feedback on this system, many are seeing appraisals come in very low for various reasons. At this tme FHA loans can still be ordered by the loan officer, but this may change soon.
FHA appraisals are affected more from the general lender tightening of underwriting guidelines that has happened over the last 2 years. Lenders are now being much more careful with appraisal values and they are doing internal appraisal reviews. This affects you when you use a FHA loan to buy a house because the FHA appraiser may appraise the property for the price you are purchasing it for, but then 2 weeks later in the loan process the lender may review the appraisal and cut the value. This means that you would either come in with cash for the difference, or renegotiate with the seller to lower the price to meet the lenders appraisal review in order to close on the house.
Comparable sales are the foundation of home appraisals. The appraiser looks for 3-6 recent home sales that are comparable to your home in size, location and age. They then use the sales prices of these recent homes to support the value they are giving your home with their appraisal. Lenders are now requiring the appraisers to provide much more recent comparable sales. Sales within 6 months used to be acceptable. Now lenders are looking for sales within 3 months and even current listings and houses pending sale. Also when lenders do their internal review appraisals, they generally do not go out and look at the property. The do what is called a “AVM” or desk appraisal. So if a house has been really upgraded or renovated, they are not giving a lot of value (if any) for that. They may use a comparable that is a fixer but they don’t know that because they are not going out to the property physically to look at it.
So as a FHA buyer it is best to work with a excellent buyers real estate agent that can help you properly value the property before you make an offer. That buyers agent should be looking at recent sales similar to the house you are making an offer on to make sure it is a realistic price that you will offer.
Warm Regards,
Rob Chomentowski (FHA loan specialist)
858-922-7899
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