FHA Appraisal & Valuation FAQs-Part 1

Written By: Stacey Sprain

I recently ran across a list of FHA appraisal and valuation questions and answers from HUD as I was actually searching for something on a completely different topic. I found these FAQs so helpful and informative I feel the need to pass them on in hopes they will be useful to you as well!

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

I am dividing out this helpful list of FAQs into a multi-part series so stay tuned to our weekly newsletter for this in the coming weeks for additional questions and answers that you will find very informative for FHA lending!

FAQ re: Termites/Wood Destroying Insects

Are termite reports for homes located in southern states still automatically required?
• FHA no longer mandates automatic inspections for wood destroying insects or organisms in existing properties (over one year old). However, pest inspections are required if, there is evidence of active infestation, it is mandated by the state or local jurisdiction, it is customary to area, or at the lender’s discretion. Prudent underwriting would dictate an inspection in areas prone to wood destroying insects or organisms.

Many areas of the country are termite prone. Should the appraiser address it or is the underwriter expected to call it out on the conditional commitment?
• The appraiser is instructed to report any evidence of infestation in the “improvements section” of the appraisal report under “foundation” by simply marking the evidence of infestation box. The box is checked only if there is evidence of infestation which may include the appraiser noting a prior treatment. FHA requires a clear pest inspection report on Wood Destroying Insects/Organisms only if there is evidence of active infestation, it is mandated by the state or local jurisdiction, is customary to the area, or at the lender’s discretion.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

Mortgagee Letter 2005-48 states that a termite inspection is no longer automatically required unless there is evidence of active infestation, it is mandated by the state or local jurisdiction, is customary to the area, or at the lender’s discretion. Can you provide more clarification of exactly how lenders should apply "customary to the area?"
• “Customary to the area” would be driven by local market practices such as incorporating provisions addressing termite or wood destroying organisms in the standard real estate sales contract in termite prone areas or where the potential of infestation exists, or local requirements such as states requiring the use of their own- wood destroying insects/organism form.

Lender discretion and prudent underwriting is key to properly evaluating the risk associated with a property’s condition including its geographic location. Lenders may refer to the TIPS (termite infestation probability) zone and use that information as one of the tools in their determination of whether or not to require a pest inspection.

The Termite Infestation Probability (TIP) Zones (available on-line at the following URL: http://www.npmapestworld.org/HUD.asp ) provide a valuable resource for lenders to have familiarity with the geographic areas in which they process and underwrite loans. The TIP zones are based on a copy of the International Residential Code map showing areas of termite infestation, prepared by the US Forest Service.

Will repairs that are now considered "minor" also be considered "minor" if listed on the termite report? Can the underwriter waive those conditions listed on the termite report to coincide with the appraisal?
• The appraiser will report what is readily observable during their visit to the property. Waiving any repairs noted on a termite report, which may or may not have been noted in the appraisal, should be evaluated on a case-by-case basis by the underwriter based on the nature and degree of deterioration noted in the termite report.

FAQ re: Well and Septic

Is the appraiser still required to report well, septic and property line distances on an addendum to the appraisal or is this only required when problems are noted? How is the lender to determine if these distance requirements are met if the appraiser is not required to identify?

• The appraiser is not required to sketch the distances between the well and septic, however, he or she should be mindful of FHA's minimum distance requirements between private wells and sources of pollution (septic systems) in the performance of FHA appraisals; and, if discernible, comment on them. Prudent appraisal practice would have the appraiser requesting a copy of a survey from the homeowner, if available.

If the appraisal notes a distance issue, it could be potential for contamination. If the appraisal notes any adverse site conditions, that may warrant further inspections or due diligence. In either case, it is the lender's decision as to whether a qualified third party should map the distances and/or require testing for compliance with local or state requirements, or, in their absence, FHA requirements. Appraisers are expected to have geographic competency, which would include familiarity with local or customary inspection requirements. Local or customary requirements should be noted within the appropriate area of the appraisal report. However, the decision to require a test, certification or inspection, other than what is automatically required as noted in ML 2005-48, is made by the lender and FHA requires the lender to be familiar with the market areas in which they lend.

Is it mandatory for a well/septic report to show distance to lot lines?
• There is no standardized well/septic report and its contents would typically be determined by what is requested. If a lender determines that there is a need to confirm distances between well and septic systems, or lot lines, then the lender would specifically request that a qualified third party measure such distances.

If a water test is required, what tests are included? FHA required tests (pre-2006) for five contaminants
but if local/state does not require testing of the five contaminants, can we just do what the state/local authorities require?
• For existing properties, FHA will defer to the testing requirements of the local jurisdiction and will not add additional contaminant level testing to that required by the local jurisdiction.

If the local authority does not have any requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) apply.

Are dug wells acceptable? Are there any changes with the new guidelines?
• Properties served by dug wells are unacceptable unless a complete survey conducted by an engineer is delivered to the lender. To be considered acceptable, the engineer’s survey must include these items:

1. A health report with no qualifications
2. A pump test indicating a flow of at least 3-5 gallons per minute supply for an existing well, and 5 gallons per minute for a new well

3. No indication of exposure to environmental contamination, mechanical chlorination or anything else that adversely affects health and safety

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

Is a well located in the basement okay? If not allowed by FHA, what if local laws permit it?
• An existing property, which is serviced by a well located within the foundations walls of the dwelling, is acceptable as security for FHA-insured financing only when the local jurisdiction recognizes and permits such a location. A well located within the foundation walls of new construction is not acceptable except in arctic or sub-arctic regions.

Will the Underwriter require a septic inspection when the property is vacant?
• Septic testing is to be governed by state or local requirements; however, the appraiser must note any readily observable deficiencies regarding the septic system and its surrounding area.

If there are obvious or readily observable signs of system failure, the appraiser is to “require inspection” to ensure that the system is in proper working order. In those instances where a subject property is vacant FHA defers to the underwriter to employ prudent underwriting in requiring any tests or certifications based on reported property conditions including property vacancy.

Does FHA have a list of the state and local governments that may require well and septic tests?
• FHA does not maintain a list of states or local jurisdictions that require well and/or septic testing. The decision to require a test, certification or inspection, other than what is automatically required as noted in ML 2005-48, is made by the lender.

If hook-up to public water is available, must the homeowner do it?
• The appraiser is required to report on the availability of connection to public and/or community water/sewer systems. The lender is responsible for the determination of the feasibility for requiring connection.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

How would shared well agreements be treated?
• Wells shared by up to four properties are acceptable provided that there is an acceptable legal agreement between the property owners, the quality of the water is found acceptable, there is sufficient capacity, and it is in accordance with local well codes. A shared well must have a shared well agreement and shall be binding upon signatory parties and their successors in title.


About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.