Disaster Area Inspection and Repair Requirements for Closing, Endoring/Insuring FHA Loans

Written By: Stacey Sprain

FHA recently released Mortgagee Letter 2012-13 which clarifies disaster area inspection requirements for determining whether or not the loan is eligible to close as well as if the loan qualifies for endorsement/insuring. Be sure to read these requirements if you lend in East Coast areas recently affected by Hurricane Sandy.

FHA Loan is in Process but has not yet Closed
Inspection of the interior and exterior of the property is required with photos to determine if the property has been damaged.

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• If no damage exists, proceed with allowing the loan to close.

• If property is damaged but estimated repair costs are below $5000 and the property is habitable, the loan may close with an escrow holdback account to accommodate the repairs.

• If the property is damaged and estimated repair costs exceed $5000 and/or the damage makes the property uninhabitable, repairs to the property must be completed prior to allowing the loan to close. Once repairs have been completed, an interior/exterior re-inspection with photos is required and if all repairs are satisfactorily completed and the property is habitable, the loan may close.

FHA Loan has Closed but has not yet been Endorsed/Insured by FHA
Re-inspection of the exterior of the property is required with photos to determine if the property has been damaged.

• If no damage exists, proceed with endorsing/insuring.

• If the property is damaged but estimated repair costs are below $5000 and the property is habitable, either
o Establish a repair escrow to accommodate the repairs and proceed with endorsing/insuring; or
o Hold the loan from endorsing/insuring until repairs have been completed and re-inspected for completion and then proceed with endorsing/insuring.

• If the property is damaged and the estimated repair costs exceed $5000 and/or the property is not habitable, the loan is not eligible for endorsing/insuring until the repairs have been completed and re-inspected with interior/exterior photos showing completion of the required repairs.

Inspection Criteria, Damage Thresholds and Repair Requirements for Appraisers
All properties with pending loans or endorsements in Disaster Areas must have a damage inspection report that identifies and quantifies damages to the dwelling. The damage inspection report must be completed by an FHA Roster Appraiser even if the inspection shows no damage to the property and the report must be dated after the FEMA-defined disaster Incident Period (as defined on FEMA’s website located at http://www.fema.gov/disasters).

FHA does not require a specific form for a damage inspection report, however, most lenders require a form 1004-D.

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

For loans that have not yet closed, FHA requires:
• An on-site inspection with interior/exterior photos;
• A statement as to dwelling habitability; and
• A statement as to whether sustained damage is
o below $5,000; or
o above $5,000.

For closed loans not yet endorsed/insured, FHA requires:
• A drive-by inspection with exterior photos;
• A statement as to dwelling habitability; and
• A statement as to whether sustained damage is
o below $5,000; or
o above $5,000.

For damage less than $5,000, the appraiser must provide the lender with a damage inspection report that includes an itemized repair estimate with costs. If the damage inspection report provided by the appraiser reveals damage in excess of $5,000, the lender must obtain an itemized estimate from a qualified third-party, such as a licensed contractor or insurance company.

In recognizing that utilities may not yet be restored in affected areas, FHA does not require the appraiser to ensure utilities are on at the time of this inspection.

Damage inspections should be completed by the original appraiser. However, if the original appraiser is not available, another FHA Roster Appraiser in good standing and having geographic competence in the affected market may be used. If the lender uses a different appraiser to inspect the property, the appraiser performing the damage inspection must be provided with a complete copy of the original appraisal.

All damages must be repaired by licensed contractors or per local jurisdictional requirements. All damages, regardless of amount, must be repaired and the property restored to pre-loss condition with appropriate and applicable documentation.

Pre-Closing Appraisal Validity in Disaster Areas
For loans that are not closed prior to the Incident Period in Disaster Areas where a damage inspection report reveals property damage, the appraisal validity period is extended from 120 days to a maximum of one year from the effective date of the original appraisal.

In no instance will an appraisal be acceptable for loan closing that has an effective date beyond one year. Loans with appraisals having effective dates in excess of one year will require a new appraisal.

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

Final Repair Inspection and Reporting Requirements
When repairs are complete on properties where loans have not closed, a final on-site inspection with interior/exterior photos is required by an FHA Roster Appraiser. The Fannie Mae form 1004D Appraisal Update and/or Completion Report must be used to determine if there has been a change in the value of the property and to confirm that repairs are complete. An appraisal update may only be performed by the original appraiser.

For loans that have not yet closed, FHA requires form 1004D Parts A and B be completed by the original appraiser. If the market value has declined since the effective date of the original appraisal, a new appraisal is required that supports the loan amount prior to closing.

For closed loans that are not yet endorsed, FHA requires form 1004D Part B only. This form can be completed by any FHA Roster Appraiser in good standing.


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.