our Buyers want a FHA loan 3.5% down (will the appraisal undervalue our house?)

Asked by Northernline, Washington, DC Mon Jun 21, 2010

We are getting close to our asking price for a small 1,200 sq ft house in Alexandria. Our buyers are under contract and want an FHA loan with only 3.5% and the closing was 2 months off. Now its 1 month off but I am nervous about the whole deal falling through because Ive been hearing an FHA appraisal would undervalue the house owing to the low downpayment it would fall apart. The city has under-assesed my street about 25%. Recent sales on my street that I know about were in 2009 and were very comparable to our deal if not 10-15% more expensive per sq ft. Should I be worried?

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Wed Jun 30, 2010
FHA appraisals are not going to hurt or help you per se. Hope that you get a good local appraiser who takes the time to really compare the comprable homes within a 2 mile radius. Because of the HVCC law it is unknown at times how good the appraiser is. Or how complete they will be. I haven't had any problem with FHA appraisals, I have had several problems with conventional ones. You should know in a few days one way or the other. I woulld ask your agent to contact the lender and ask if the home appraised and if he or she forsees any problems. Please let us know how it turns out.
0 votes
Aaron Smith, Agent, Washington, DC
Tue Jun 22, 2010
Hmm, the kicker in the last letter is the word "Correctly".
The one in the letter before last was the idea of "overpriced for the market area"
The first letter seems to me, to be the most specifically correct. He is local and experienced.

But to answer your questions,
a) Will the Appraisal undervalue our house; the answer is "No ".
b) Should you be worried? Be afraid, be very afraid.

How can both answers be correct? Because, by definition, an appraisal DEFINES the value of your home. If the appraisal is lower than the contract price, then, by the professional opinion of the appraiser, the property was "overpriced for the market area". The better question would have been, "Will the appraisal come in for the value of the contract?" That's trickier, and much, much harder.

Congress passed some new laws to prevent fraud in the mortgage industry (desperately needed reforms.) They were intended to prevent collusion between lenders (particularly mortgage brokers) and appraisers; as well as stabilize the volatility of the market. Some of the rules they passed seem to have unintended consequences, as implemented.

One of the rules is that there can no longer be communication between the loan originator and the appraiser. The implementation is that lenders now have to go through a "Appraiser Agency", i.e., a bucket shop approach. The loan office calls the appraisal agency and defines the property and the price they will offer for the appraisal; the Appraisal agency uses some internal process to pick an appraiser for the job, a qualified appraiser (at least on paper.)

We have seen, recently, however, a greatly increased number of appraisers from far outside the subject area being called in to do the appraisal. These non-locals seem unaware of both the absolute value of the area to a property (often a few blocks, or crossing a significant dividing road can significantly affect value.) AND the relative value of urban amenities (such as the greater significance of parking, location in a Historic District, or even style). I believe the best value determination is by someone who is intimately familiar with the area, the subject property, and the comparables.

In addition, the rules for FHA loans reduce the value of basement amenities & additions, regardless of how valuable a buyer might find a basement guest room, extra storage, full bath, or even unit. You may receive some credit, but not as much value as the market might indicate.

Another issue is that FHA loans only use comparables for the last 90 days, which, particularly in my area, which is very seasonable, with the 'Summer Doldrums' affecting value substantially. The sales from 2009 will not be considered except as historic data, I believe.

Another trouble is that FHA loans use short sales, foreclosures and other criteria, with what seem, to me, to be minimal adjustments. If there are nearby, recent foreclosures or short sales for similar properties, and no conventional sales to override them, then those will be used, in fact, by law, must be used, I've been told.

Another concern is that an FHA appraisal is locked in for, I believe 6 months; i.e. a low appraisal cannot be replaced by an appraisal (higher or lower) with more recent comparables, even though there may be completely different, higher (or lower) comps in those last 6 months. You CAN appeal the appraisal, but, even if successful, the appraisal is sent to the SAME Appraiser for reconsideration. I believe that the appraiser has nothing to gain, and much to lose if he agrees that his original appraisal was flawed.

So, should you be worried? Probably.

Is there anything you can do? Probably not
We try to make sure that we use small, local lenders, who use a smaller 'Bucket Shop' and often know who is in that stable of appraisers, even if not the particular appraiser per case, and can determine whether they are actually experienced in the subject area. But, we are in for some dicey times until someone smarter than I figures out a better way to implement rules that both prevent fraud and more accurately reflect market value for a home than the current one.

0 votes
Noel A Sheph…, , District of Columbia
Tue Jun 22, 2010
I agree with David. If the property was priced correctly to begin with you should not have a problem. I've closed many FHA Loans in 2010 and have not had any appraisal issues.
Web Reference:  http://www.noelshepherd.com
0 votes
David - Appr…, , Maricopa, AZ
Mon Jun 21, 2010
If your listing agent (if you have) has not over priced you property to begin with, then the FHA appraisal would most likely reflect it.

It is not easy to get on the FHA approved appraiser roster, so it is highly unlikely an appraiser would undervalue a property (which would in reality be appraisal fraud) because a buyer financing with an FHA insured loan.

I can't say specifically about your market area, but in my area, it is common for complaints of "undervalued" or "low balled" appraisals (conventional or fha) because they don't "hit the value needed" for the deal to close, when in reality the properties are overpriced for the market area to begin with.
0 votes
Gerald Seega…, , Washington, DC
Mon Jun 21, 2010
You should be fine. I am going to closing on the sale of a 1260 townhouse also located in Alexandria on Wed. Buyer is gong VA (100% financing) and this had no impact on the appraisal. The appraiser used comps of recent sales and not the assessed value. For the most part, the sales prices have increased in Alexandria City since last year. Besides, I think there would be some serious legal issues to address if a lender/appraiser reduced or discounted the value of property because someone use an FHA loan.
Web Reference:  http://www.urbanerealty.com
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