From time to time, we get some really great questions from our clients. We thought it would be great to share this exchange and post it to our BLOG.
QUESTION FROM OUR CLIENT: "...G2 regarding the FHA loan I started to remember FHA information from a class I had. The appraiser I worked with did not do FHA and also remember that there are FHA only appraisers at least here in Bozeman. I also remember that many appraisers did not like dealing with FHA because of the restrictions…”
You are correct in that only FHA certified appraisers can do FHA appraisals. However it is most common that FHA appraisers also conduct appraisals for conventional lenders and some FHA certified appraisers may also hold a third certificate, that to conduct VA appraisals.
QUESTION FROM OUR CLIENT: “…I apologize for not understanding more of the process, but why do we have to wait for the underwriter to approve this loan when the buyers were qualified before making the offer and the appraisal came in for the price offered, and what does HUD have to do with this. I thought HUD and FHA were separate processes and requirements...”
LOL… my chuckle is not because of the question but more because you are filled with some of the best questions I have had the pleasure to field, in a very long time… ;-)
FHA (Federal Housing Administration) insures lenders against loss in the event that borrowers default on their loans. FHA's mission has always been to encourage lenders to make loans that have higher default risk than traditional conventional loans. The FHA was actually given birth in the wake of the Great Depression of the 1930s. Lenders had all but stopped making loans of any kind. Enter the Federal Housing Administration. Today, FHA's roll has a very similar face to the one it projected as our country healed itself from the wounds of the Great Depression. FHA continues to insure, NOT GUARANTY, loans to low-and-moderate-income home buyers, who may have somewhat questionable credit or who find it difficult to come up with the required cash to complete the transaction.
HUD (The Department of Housing and Urban Development) is a Federal agency, with Cabinet Level authority, and is a voice for the consumer. HUD is responsible for ensuring that all fair housing laws are enforced, as well as assisting in the Nation's development of communities that address America's housing needs. HUD plays a major role in the loan approval process by underwriting homeownership for lower to moderate income buyers through its Mortgage Insurance Program, also known as MIP. In the conventional arena, this type of insurance is referred to as PMI.
Both insurance programs do a similar job of protecting lender's from financial disaster in the event of a mortgage failure or default. MIP is a HUD insurance product and PMI is a private sector insurance product. The larger private MI companies are Genworth (Genworth Mortgage Insurance), MGIC (Mortgage Guaranty Insurance Corporation), RMIC (Republic Mortgage Insurance Company) and Radian (Radian Mortgage Insurance). These companies set the tenor of the Mortgage Insurance industry and play a heavy roll in loan approvals.
At the end of the day, and even though a loan has been given the Stamp of Approval by the Fannie Mae or Freddie Mac, DU (Direct Underwriting) or LP (Loan Prospector) computerized loan approval systems, federal lending guidelines still require the final loan package to be submitted for an “Eyes-On and Hands-On” review by a human being.
Now to the point you made about the buyer being qualified or pre-approved, that is still the case, assuming the buyer has done nothing to jeopardize their loan approval such as buying a big ticket item like a Hummer or an Air Plane or a pair of Jet Skis or… well you get the picture. The other part of any loan approval is the property. Even if the buyer is made of GOLD, a loan can still fail if the property does not pass muster. That is why all FHA Loans have an additional FHA requirement of the FHA Amendatory Clause. The FHA Amendatory clause states that the property MUST appraise for, at a minimum, the price agreed to between the parties… or the FHA loan will not be granted. The appraised value referrers to the value that is finally approved by the underwriter. Therefore, if a FHA underwriter requires an Appraisal Review and if after the Appraisal Review is completed, the review appraiser finds a different “opinion of value” it is most likely that the FHA underwriter will devalue the properties value to that of the review appraisal. I shared a very real scenario of this type of goings on a while back when I sent you two appraisals for the same property, wherein the underwriter devalued the first appraisal, that came in at contract price, down by about $7,000.
I don’t want to put more squirrels in your stomach. But you have to be mindful of the nuances of the lending and appraisal world as it is today. All of yesterdays and yesteryears methodology is off the table. It’s a new day and a new world and we’re all stuck right in the middle of it. It’s simply a box of rocks that ALL FHA buyers and sellers must deal with.
(We forwarded a copy of the Preliminary Appraisal Report for her records. We explained that, as long as the FHA/HUD underwriter did not flag the appraisal for an appraisal review, the appraisal submitted would be the document that would stand as the accepted appraisers “Opinion of Value” by the FHA underwriter.)
We hope this exchange will help clear up some of your questions as you engage your next real estate transaction. Oh yes... at the end of the day, the FHA underwriter approved the appraisal for the contract price.
Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@GoAirForceHomes.info.
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