How long and under what circumstances are FHA appraisals binding?
QUESTION: Several months ago, I had a home listed for sale. A buyer made an offer very close to our listing price and my client accepted that offer. In the contract, the buyer disclosed that he intended to obtain an FHA loan in order to purchase the property. The buyer applied for that FHA loan and his lender arranged for the required appraisal. However, the buyer was never able to adequately document his income from a part-time job. As a result, his loan application was denied. The property is now back on the market and my client has asked me how long we are “stuck” with the appraised value as determined by buyer number one’s FHA-approved appraiser. I remember hearing that FHA appraisals are binding for six months. Is that what I should tell my client?
ANSWER: Absolutely not. At one time, FHA guidelines did call for an appraisal to be considered valid for six months. However, when property values started falling rapidly in 2008 and 2009, and defaults related to FHA-insured loans began to increase, the FHA became concerned about losses due to inaccurate appraisal values. To reduce their risk, the FHA implemented a new policy effective February 15, 2010 reducing FHA’s appraisal validity period to four months. The press release announcing this new policy stated that the change would provide for more accurate home values during volatile housing market conditions.
The four month “validity period” begins to run on the day the home is inspected by the FHA appraiser. Extensions to this four-month term are possible. For example, if a borrower has either signed a purchase agreement or been approved for a loan prior to the expiration the validity period, the period may be extended, at the option of the lender, for an additional 30 days to allow for the closing of the loan. If the appraiser completes something called an Appraisal Update and/or Completion Report, the validity period will be extended by 120 days to a total of 240 days. Details concerning these extensions are set forth in Chapter 4 of HUD’s handbook entitled “Lender’s Guide to the Single Family Mortgage Insurance Process” (also known as “Handbook 4155.2”).
Another issue to consider is whether an FHA appraisal will be binding if a buyer changes lenders, or if a deal falls apart entirely and a contract is signed with a new buyer. In general, a buyer cannot order a second appraisal during the term of the first appraisal, even if he goes to a new lender. In other words, “appraiser shopping” is not permitted except in very limited circumstances. Examples are where the first appraisal contains material deficiencies, and where the first appraiser is on the second lender’s list of excluded appraisers.
Where a sale to buyer number one falls through, it is possible that lender number one will refuse to turn over an appraisal it ordered to a lender for a second buyer. In that case, buyer number two’s lender will have to order an entirely new appraisal, even if the expected closing date is within the 120-day “term” of the first appraisal. If the lender for buyer number one does turn over the appraisal to the lender for buyer number two (or if the lender is the same for both buyers), the first appraisal will still be valid and in most cases it will still be binding on the parties.
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