How much have the FHA requirements changed?

By now, you have heard that the FHA requirements for residential appraisers are soon changing.  This has caused some real consternation among appraisers across the fruited plain.  Rumors have formulated and appraisers are prepared for the worst.  I just finished a 7-hour course on the new HUD changes and my advice is simple; chill out!

First of all, let me make it very clear; I am not an FHA expert, lawyer, nor am I acting in an official capacity whatsoever.  The advice herein is simply my opinions based on casual observation and should be taken with a large grain of salt thrown over the proverbial shoulder.  The information is worth about what you paid for it.  

First, a little background.  There is a new HUD handbook.  It is titled 4000.1 and is supposed to supplant all previous HUD handbooks and official Mortgage Letters.  That is not to say that there will not be addendums and changes in the future, but as of September 14, 2015, HUD 4000.1 is the new king of the block.  I suggest (with no salt, sugar, or cream thrown over the shoulder) that you pick up a copy and read it.  If you are on the HUD panel (or want to be in the future) you need to familiarize yourself with this new handbook as it will become your bible.  

That being said, do not get the idea that, though the handbook is thick your whole world is a changin’.  Indeed, most everything in the new handbook is, with some pointed exceptions, about what you have been doing all along.  Appraisal assignments will mostly look conspicuously like they always have.  So what is changing?  

This article does not claim nor intend to be an exhaustive list of the FHA changes.  There are lists available in several places online (and again, I recommend you read the book for your own list).   Instead, I want to simply make you aware of some of the more major items that you will want to be aware of as well as some confusing items that may need clarifying in the future.  

As I read it, there are anywhere from a dozen to sixteen ‘changes’ to the appraiser’s scope of work as it relates to FHA inspections and the appraisal process.  I give a range because many of these things I have been doing for years and, though I am told they are different than before, they are not any different than I have been doing already.  In other words, after a 7-hour course on the new HUD Handbook, I walked away breathing a big sigh of relief that my life was not going to be upended and turned around.  

Enough with your stall tactics, Dustin!  On to the biggest differences.  

First, you will now be required to check the sales history for all comparables for 36 months (not just 12 months).  This is something we have been doing at our office for a while now (due to client request), so this did not seem like a big deal to me, but it will be for some.  

You are expected to view all areas of the crawlspace and attic (yes, I said “all”).  Only a head and shoulders inspection is still required, but if you cannot see all of the corners, it looks like you will be going for a spelunking adventure.  On the other hand, the handbook is quick to point out that an appraiser should not disturb insulation and such.  Now, this is the area that may need some clarification from HUD.  Even our instructor (someone supposedly well-versed in 4000.1) could not answer the question of how that is possible.  Yet, the appraiser is required to certify the areas are free of trash and vermin.  Does that include an old pop can dropped by the construction worker when he put the furnace in?  Does that include spider-free?  Do salamanders count?  I guess that is yet to be understood.

Speaking of confusing parts of the new handbook; let’s talk about electricity.  My reading of 4000.1 seems to use some potentially contradictory language.  We will be required to certify  that the electrical receptacles are working, but we are not required to probe anything into them to test.  Hmmmm.  Would someone explain that one to me?  

Finally, appraisers are now required by HUD to test appliances to ensure they are working properly.  Again, there is some ambiguous language here.  First of all, we are told to check all appliances that are being conveyed as part of the transaction.  Does that mean toaster ovens that are not permanently attached?  What does a test look like?  Do we bring a chicken to the home and wait for it to cook to make sure it is cooking evenly?  Naturally, I digress a bit as I am sure HUD does not want you to get that picky, but the question of liability does come up.  What happens if an appraiser turns on one burner on the stovetop to makes sure it works, but does not turn on the other three.  Suzy Homemaker buys her dream home, Johnny turns on one of the other burners two weeks later to cook mac-n-cheese and it blows up in his face.  Is Joe Appraiser now liable?  

For brevity’s sake, I have only touched on a few things that stood out to me personally as I went through the new handbook.  I am sure there is much to learn and many important things in the new HUD 4000.1 that I have not brought to your attention.  I recently recorded a podcast that goes into a little more detail than could be done here (The Appraiser Coach Podcast Episode #033), but I again urge you to read 40001 on your own.

Naturally, there are many questions left to be answered.  It is easy to believe that HUD would not be so literal in the interpretation of the guidebook, but in the litigious society we now live in, one must wonder what could happen.  As one appraiser in my class put it, “Do I really want to keep doing FHA appraisals?”  It is a good question and one which every appraiser should be asking themselves.

If you have any comments or would like to submit content of your own email


About Dustin Harris

Dustin Harris
Dustin Harris is a successful, self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and consultant. He also owns and operates The Appraiser Coach where he personally advises and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth. His free podcast can be listened to on iTunes and Stitcher. He and his wife reside in Idaho with their four children. He loves playing in the outdoors and watching movies indoors.

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    Well Dustin, Here’s the problem, it’s called liability. As usual more liability is being shifted to the appraiser as we are the low hanging fruit. Bottom line fellow appraisers, you had better plan on doubling your fees for FHA appraisals because you are now the home inspector as well.

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    I for one am not renewing my FHA status. We need to certify that the amperage is ok for the dwelling (I am not an electrician) we need to check (and test) the pressure valve on the hot water tank (heck no) what about all those crawl spaces with peoples crap in them that doesn’t allow me to see every corner (forget about it). Appliances have to be run (yep waiting for the dishwasher to cycle and then flood FUN) I too could go on and on but the simple fact of the matter is I will be passing this liability on to someone who isn’t very careful!

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    Not sure I will go the ‘non-renewal’ route, but I am definitely increasing my fees for FHA work. I used to work as a plumber/pipefitter and we discouraged home-owners from testing the pressure relief valves on their water heaters. A quick tap should not cause a problem, but if there is any sediment in the water it is likely to lodge in the relief valve and the valve will leak forever more. Most 5 year old water heaters have several inches of sediment in the bottom of the tank. Lots of increased liability – and the FHA reviewers teaching the class last year said we should get rid of our polarity testers, now we need to certify that all outlets are functional? HOW?

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      I use one of the plug in lights for refrigerator/freezers that do out if the electricity goes off to let you know the freezer is getting ready to stink. They are three prong and come two to the pack at Lowes/Home Depot.

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    Guest Instructor

    With all respect, you need to read the 4000.1 again as many of your statements are incorrect. For example you state you are not required to “probe anything into the receptacles” The handbook says into the Circuit Breaker Panel not receptacles.
    3 year comparable sale and transfer history is not in the 4000.1 document. It is found in another very important document “Appraisal Report Data Delivery Guide”.
    Head and shoulders is only acceptable if you can not fully enter the crawl space or attic.
    Your instructor did a bad job. Please read the 4000.1 and the Appraisal Report Data Delivery Guide again!

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      Thanks for clarifying those points but I think Dustin has brought to light some major issues. Sorry, I have been a leader in various organizations my entire life and I have no patience for those who quiver like a dog passing razor blades, in the bushes, and who take shots at someone making a contribution. Obviously you are knowledgeable, so reach down and find a pair. “With all respect”, next time Einstein, why don’t you write the article.

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        Guest Instructor

        Bike Boy – you must be the coach’s water boy!
        If you are the coach you should know something about the game and the rules of the game – not just pen articles containing incorrect information to get your name out so people will join your club!

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    Complete overkill b.s. is what these FHA 4000.1 new requirements are. This is basically doing “home inspections” for the govt. I just write in and disclose the attic/crawl had no access. Am I going to start carrying around a ladder? Not. I will observe and photograph the electrical service box and label amperage; not test outlets like a home inspector. I will not test a h/w heater relief valve. If its leaking; disclose and take a picture. Run the appliances??? They are personal property/chattel to begin with. They just want us to take on more liability to cover their paper pushing as*es. Fck them.

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    Why are so many appraisers afraid to take responsibility? Ask yourself how hard would it be to learn how to complete these additional requirements if you don’t already know how. This is an opportunity for appraisers to increase their fees and income. How much more time would it take to complete your FHA inspection? 30 minutes? 45 minutes? An hour at the most? I’ll gladly increase my fees $100-$150 for an extra hour and learn something new in the process. While other appraisers are looking for excuses and new ways to complain, I’ll be at the bank! “Learn something new, it may change your life”

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      Dishwashers : “Normal” cycles stretch to two hours and beyond. Okay, now let’s talk about the washer, dryer, oven and all cycles of the hot tub. Don’t forget to run the lawn sprinklers and check for leaks. You can see where this is going. It’s absurd. Put the day aside per inspection or buy some borrower a few appliances, now and then.

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    My initial reaction is “screw that. No more FHA”, but then I figure a lot of appraisers will go that route (I agree: they’re trying to make us inspectors, and I have no desire to fill that role), so maybe I need to look at this as an opportunity rather than a problem. If the fee is right, I’ll do it. If it ain’t, I won’t. Of course I’ll need to make changes to my liability insurance, but the huge fees will more than cover that.

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    Can anyone define “working properly”? Such vague terminology represents a tremendous liability. It is misleading in that it positions the appraiser as an expert that is qualified to render such a conclusion. Now I can state that I operated a switch and the lights came on. Or I touched the stove and was not shocked. That does not mean the electrical system is working properly or even safe. There is no way an electrician would reach such a conclusion after operating a few lights and fans in each room. Why would an appraiser?

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    After 20 years on the FHA panel, we gave it up for liability reasons when they went to the current rules (before the new changes) years ago. The FHA assured appraisers they were not expected to be home inspectors and then promptly put out an advertisement to buyers touting all of the home inspecting the appraisers would be doing. I don’t know if we did the right thing giving up being on the panel, but we certainly sleep well at night.

    The new requirements seem to be more in the same direction. When I discuss the FHA requirement to inspect attic and crawl spaces my wife (who was FHA approved) just laughs. She says, :No way, no how” is she going to do that – she’s not a home inspector! I’m sure she will be thrilled all over again, when she hears the new requirements, that we’re off the panel. And good luck getting those much higher fees. Hats off to those who continue to hang in there doing this work, but it is not for us.

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    The new FHA inspection requirements seem to be going back to earlier years. I was approved as a Direct Endorsement FHA Appraiser in ’86 and became a HUD Compliance inspector in ’87. In those days most appraisers came from construction backgrounds, to Real Estate Sales Agents to Brokers and if lucky became Appraisers. Anyone could claim to be an appraiser but the catch was, Lenders wouldn’t accept their work unless an Appraiser, already approved and doing work for them, reviewed and signed off on the reports. My wife and I were both Real Estate Brokers and the mortgage broker I gave my loans bought part of a mortgage Co. He offered to give me his appraisal assignments if I would get a particular appraiser to sign off. The Appraiser he required was my wife’s first broker. He agreed. Morgan Appraisal Service opened for business in Atlanta January ’83. after a few months, we were no longer required to have our work signed off.
    Appraisers had to show proof of three years appraisal work to qualify for FHA appraisal training and after attending days of training were certified.
    Inspections were more in depth and required the appraiser to have a good working knowledge of construction since they were required to list all needed repairs. Many appraisers were also home builders. A HUD Compliance inspector was required to be sure the repairs were properly completed in a workmanship like manner. After License law came about in ’91, anyone who took the course and passed the state exam was an appraiser.
    FHA started getting sued by homeowners who found needed repairs in their home that were overlooked by appraisers unknowledgeable about construction. FHA then required buyers to sign a statement stating the appraisal was not a Home Inspection and urging them to get a Home Inspection with the cost rolled into the loan package. With that responsibility lifted, FHA appraisal quality took a nosedive. In an effort to improve appraisal quality, FHA started requiring appraisers to hold Certified Residential Appraiser License to appear on the FHA’s approved list. A sideways move at best since the required knowledge level to do a creditable appraisal job has not been improved.
    When things couldn’t seem to get worse, and appraisers are walking around with big ole targets on our backs, along came AMC’s to skim the fees that appraisers rightly earned thereby driving a stake in the heart of the appraisal business.

    So there you have it, the short history of property appraising from then to now by someone who lived through it all, good and bad.

    FHA seems to be going back to the old days where inspections are concerned. Now, If the AMC’s were banned, the Real Estate Appraisal business may survive.

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    I thought the same thing reading the new regs…bring some laundry and dinner to the inspection and run the washer, dryer and oven through its paces? Wash the dirty dishes in the dishwasher to make sure all the cycles work? How about a disclaimer like with the outlets that a sampling of the appliances features were operated and worked as of the time of the inspection?

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    Many years ago, a standard form for FHA was a statement of, Get a home inspection as the appraiser/appraisal is not a home inspection., and so on. My biggest problem would be with appliances which I feel are most of the time personal property. I can do them, but the fees are going up, $$.

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    The obvious solution to the new FHA requirements is to hire a home inspector to do the “observations” and testing that appraisers are not competent to complete. The vast majority of appraisers are not competent in completing the new FHA requirements with regard to the non- value related changes. To claim to be competent in these areas would be a USPAP violation. Employ the services of a competent home appraiser and disclose in the report that significant assistance was provided in the FHA physical inspection. Raise your fees for the FHA inspection to cover the cost of the inspector plus an entrprenurial profit and possibly a risk factor. Unfortunately ther will be a certain percentage of appraisers out there who will claim competency and continue to do FHA assignments for a nominal fee. And lenders / HUD won’t really care because the cheap and fast crowd will get what they want – Again!

    A home buyer will not seriously hire an appraiser to do their home inspection. Why on earth would HUD?

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    Has anyone been able to get a fee increase on FHA appraisals? Here in Georgia, the AMC’s have just laughed at the question of a higher fee. Please respond, so I know what is happening in other areas. Thanks.

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    Cynthia Holstine

    Can I find an answer? I got approved for FHA the appraiser says he is not sure they will approve the house because it is on a concrete slab with absolutely no crawl space. He went home to investigate. I love this house. Does anyone have experience with this?

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