FHA Appraisal & Valuation Part 3- New Construction & Cost Approach FAQs

Written By: Stacey Sprain

This is part 3 of a multi-part series that provides helpful questions and answers about FHA appraisals, properties and valuations. I recently ran across this list as I was actually searching for something on a completely different topic. I found these FAQs so helpful and informative I felt the need to pass them on in hopes they will be useful to you as well!

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Watch our weekly newsletter in the coming weeks for additional questions and answers that you will find very informative for FHA lending!

New Construction FAQs

What are the new construction documentation requirements for appraisers on properties 90% or more complete?
• Appendix D provides guidance for appraisers in the performance of FHA appraisals. In those cases involving new construction that is 90% or more complete, including existing less than one year old, the appraiser does not need the plans and specs to perform an appraisal.

What are the new construction documentation requirements for lenders on new construction?
• FHA has revised the list of architectural exhibits needed for single-family properties one year old or less excluding manufactured homes and condominiums, which have separate requirements. Per Mortgagee Letter 2006-33, lenders are not required to obtain, retain or submit to FHA construction plans and specifications, including:
• Plot Plan
• Floor Plan
• Exterior Elevations, Sections and Details
• Specifications, form HUD-92005 (Description of Materials)

FHA does require the submission and retention of the following documents for compliance review purposes:

• Builder’s Certification of Plans, Specifications and Site, form HUD-92541
• Builder’s Warranty, form HUD-92544 (on high ratio loans that are greater than 90%).
• Building Permit and Certificate of Occupancy or 3 Compliance Inspections by an FHA Inspector (Footing, Framing and Final) or 10-Year Warranty and a Final Inspection by an FHA Inspector (refer to ML 01-27)
• Wood Infestation Report, NPCA 99a and 99b
• Local Health Authority well water analysis or septic report, where applicable

NOTE: If a property is 100% complete (existing construction less than one year old), the lender must obtain and retain the following documents:

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

• Builder’s Certification of Plans, Specifications and Site, form HUD-92541
• Builder’s Warranty, form HUD-92544 (on high ratio loans only)
• Wood Infestation Report, NPCA 99a and 99b
• Local Health Authority well water analysis or septic report, where applicable

If the builder has gone out of business and no longer willing/able to sign the Builder’s Certification or Builder’s One Year Warranty and the foreclosing lender has a buyer who will rely upon FHA-insured financing to purchase the home, what documentation is required to be retained in the case binder?
• If the construction is completed and the lender has a certificate of occupancy or its equivalent, the home may be treated as existing construction for purposes of FHA documentation.

Is the lender required to maintain a copy of the plans and specs on new construction, less than 1 year old, when a certificate of occupancy has not been issued?
• No.

When a property is "Under construction, more than 90% complete with only minor finish work remaining…”, the appraiser is instructed to condition the appraisal "Subject to the following Repairs or Alterations" Who does the final inspection, an Inspector or an Appraiser?
• The final inspection may be completed by anyone the lender selects for those cases processed under the guidance of ML 01-27 (Lender to Certify); otherwise, the final inspection must be done by a FHA fee inspector.

Cost Approach FAQs
When is the cost approach required for an FHA appraisal?
• The cost approach is required when the subject is a unique property, has specialized improvements, is new manufactured housing (initial sale from manufacturer), or the client requests the Cost Approach be completed. The square foot method is to be used and addressed in the Cost Approach section of the applicable appraisal reporting form.

If an appraiser completes the cost approach, do they still use form 1007 or has it too been eliminated?
• The Marshall & Swift Square Foot Appraisal Form, form 1007, has not been eliminated. It is still in use.

In those instances where the cost approach is employed, FHA feels the use of the applicable appraisal reporting form together with the guidance provided in Appendix D of Handbook 4150.2 is sufficient to produce an accurate and adequately supported cost approach.

Be mindful that form 1007 may be required for use by those HOCs with jurisdictions having properties eligible for FHA-insured mortgages under:
1) HUD/FHA’s Section 248 program on Tribal Trust Land or
2) HUD’s Office of Native American Program (HUD/ONAP) Section 184 on Tribal Trust, or
3) Homestead lease granted by the Department of Hawaiian Home Lands covering a one-to-four unit family residence located on Hawaiian homelands.

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

Where does the appraiser insert Remaining Economic Life on the condo form to comply with FHA reporting requirements?
• It is to be entered in the Reconciliation section of the form 1073 as a statement similar to that contained in the cost approach section of the other three FHA approved forms, i.e. "Estimated Remaining Economic Life ______ Years."


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.